What ails the Banking Sector?
While the Sensex & Nifty indices have run-up 40-50% over the past year, and sectors such as capital goods have hit 60% returns, this hasn’t been true for the banking sector, as a whole. Below is a chart of the top-4 banks, which together account for over 75% of the BSE Bankex sector index, over a 1-year period. Except for ICICI, all other banks have trailed the Nifty-50 market index.
![Top-4 Banks vs. Nifty-50 (1 year)](\"http://www.galatime.com/images/2006/bank_1yr.png" "Top-4 Banks vs. Nifty-50 (1 year)")
Zooming into the past 3 months, we see a similar situation, except that HDFC Bank has shown some strength, while the State Bank of India turned into a laggard.
![Top-4 Banks vs. Nifty-50 (3 months)](\"http://www.galatime.com/images/2006/bank_3mo.png" "Top-4 Banks vs. Nifty-50 (3 months)")
Why this weakness in performance, while the Indian economy has boomed, with record growth in consumer spending, home loans and such? It could be a combination of factors such as competition from international banks, stabilization of interest rates (combined with a flattish yield curve), slowdown in liberalisation & reforms, concerns over non-performing assets (NPAs), etc.
I’ll use the “Live Charts” page to monitor relative strength of these scrips - let’s see if the ‘06 budget brings a change of trend for this sector.
PS: I’m enjoying the active comments by readers as well as the email messages. Thanks!
One reason for the stale performance of banking stock is the reduction in the spread between the cost of off-loading and the cost of funds. HDFC Bank recently pointed that the margins are down to 2.18%. Banks like ICICI Bank and SBI would have even lower margins.
Secondly, I was wondering if you can arrive at a model for evaluating banking stocks using say, a DCF, or a NCAV etc.
Warm Regards
Shankar
small2big.blogspot.com
Comment by Shankar — February 15, 2006 @ 11:35 am
Shankar,
Thanks for your comments.
Since I’m not much of a value-focused investor, I think your question about DCF/NCAV can be best answered by fellow bloggers that I’ve listed under the “Value Investing” category on the right sidebar.
Cheers!
Comment by Kaushik — February 15, 2006 @ 1:57 pm
Hi Shankar, Kaushik
Banks can be best valued by the spread they earn from borrowing (time deposits) and lending (advances). Shankar rightly pointed out that this spread has witnessed a narrowing in recent times. Additionally, many banks witnessed a significant drop in profits over the last one year (due to lower treasury income), which explains the poor peformance of banks (mostly PSU banks) over the past few months. This phase is almost over now.
Further, the current investment boom is expected to result in higher profits and higher income for banks, which makes them attractive buys. Other things to look at when investing in banks would be an increase in gross NPA levels (and not Net NPA levels). A rise in GNPA’s is a bad sign.
Textbooks taught us that banks and financial companies can best be valued by the dividend discount model. Shankar, maybe you can do a google to find out more on the ‘dividend discount model’.
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Regards.
Comment by Ravi Purohit — February 15, 2006 @ 2:50 pm