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Time to Shop For Bank Stocks

| 9/26/2011 4:07 PM Monday

The global macro-economic situation has been generating a sense of deja vu vis-à-vis the scenario of 2008, when we saw one of the worst economic crises after the Great Depression of the 1930s. The sector that was hit the most was the financial sector. The current situation is almost the same, and the only difference this time is that the European banks are in a tight spot, instead of their American counterparts. This is vindicated by Moody's recent down-grading of Societe Generale and Credit Agricole, two of France’s largest banks, over concerns that they hold insufficient capital to withstand a Greek default.

The Indian banking sector has not remained immune to these events, even though it had shown a lot of resilience during the financial crisis of 2008. It seems to be in turbulent waters in the current wave of economic predicament, when fears of a double dip recession are becoming more and more evident. It is for the first time since January 2002 – when the BSE Bankex was introduced – that the index has shown negative growth for three quarters in a row, starting from September 2010 to June 2011, while a fourth quarter of negative growth is possibly in the offing, as it is very unlikely that Bankex will recover 13 per cent in the remaining 10 days of September. The public sector banks that displayed better resilience during 2008 are at the centre of the storm this time.

This is reflected in the performance of the CNX PSU Banks Index (an index that represents 91.27 per cent of the free float market capitalisation of the stocks forming a part of the total PSU banks that are listed), which is down by 27 per cent year till date, compared to an 18 per cent decline in the BSE Bankex (an index that covers the entire banking space). So, where do we go from here? Is it the right time to look at the banking sector and stocks now? Will macro-economic factors affecting the banking space and, in turn, the performance of the banking stocks, fall into place? Here is an analysis of the various factors, and the probable scenario in each of it that is likely to emerge going forward.

Credit Growth

One of the primary reasons for such a fall in the banking index is the slow-down in credit growth. After witnessing a growth of 28 per cent on a yearly basis for the month of December 2010, credit growth has dropped to 20 per cent for the month ending August 2011. If we look at credit growth for the four months ending July 2011, it grew by 21 per cent, and one major contributor to this growth was the industrial sector, which grew by 24 per cent on a yearly basis. The industrial sector accounts for almost 45 per cent of the total non-food credit. Even in this sector, it is the medium-sized industries that saw the fastest loan growth of 35 per cent. Apart from industry, another sector where credit growth was robust in the same period was the non-banking financial companies (NBFCs) that grew by 52 per cent on a yearly basis. Among those that have actually seen a moderation in credit growth is the personal loans segment, which grew by 17 per cent in the same time.

Going forward, we believe that the credit growth rate will further decline, at least for the next few quarters, as the rate hikes by the RBI might act as a deterring factor. However, we do not foresee a sharp drop in credit growth, as had been witnessed during 2008, when credit growth dropped from its peak of 40 per cent in September 2005 to a low of 10 per cent in October 2009.  This is because, if we look at the period between July 2003 and June 2008, we can see that the aver-age monthly credit growth was around 27 per cent, whereas in the current scenario, it is just 22 per cent. What this essentially means is that despite the economy growing at the pre-crisis levels of more than eight per cent, credit growth was not at the same rate, which indicates that there have been very few excesses and banks have been more cautious while lending. This can be exemplified by the drop of six per cent in the credit card lending for the first four month of FY12.

 

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