Is Investing in Bank Equity a Safe Proposition?

Investments falling in Indian Banking Sector

Investments falling in Indian Banking SectorDisappointing Quarterly Results

Quarter 3 of FY 2014-15 has been exceptionally hard on the Indian banking sector. Let’s consider the case of ICICI Bank. Despite a rise in its standalone profit by almost 14.10 percent (INR 28.89 billion), the results had missed estimates by less than a billion. The share tanked over 6.5 percent on the day the results were declared. Axis Bank declared a net profit rise of about 18.43 percent to INR 1899.76 crore in Q3 2014-15 over the same quarter in 2013-14. And yet the share registered a gain of only about 0.95 percent as the results hit the markets. HDFC Bank equity also registered a fall of about 3 percent despite declaring an 11.5 percent increase in its quarterly net profit figures.

PSU banks haven’t fared much better either other than the State Bank of India. Improvement in asset quality and high interest income has led to an increase in SBI’s net profit in December quarter by 30 per cent to Rs 2,910 crore. This has boosted shares of the country’s largest lender by 6.8 per cent. SBI equity has registered a considerable downslide over the past few trading sessions. The bank’s stock was trading at about INR 325 late January (closing INR 327.45 – Jan 26) but is currently trading around INR 306 (closing INR 305.65 – Feb 18) at the NSE. This trend has indeed been quite unsettling, especially for retail investors, who have hitherto come to depend upon the banking sector equity as a safe and sound investment.

Punjab National Bank stock dipped almost 8 percent with the declaration of Q3 results. With a net profit of 2.5 percent the bank missed street expectations by a wide margin. Bank of Baroda stock lost about 12.12 percent after Q3 results showed a net profit decline of 68.12 percent. The shares of almost all public banks have registered a decline with the declaration of Q3 results. On January 30, BankNifty registered its worst fall in almost a year and registered a loss of about 3.34 percent. Recovery has not yet been in sight.

Investment Strategy

The big question haunting investors, retail investors in particular, is that of a possible investment strategy when it comes to banks and banking stocks. There are no clear answers. While some market experts such as Hemindra Harzari were reported by the Economic Times suggesting that the PSU banks are best avoided at current levels, others are clearly looking at the market as a “buy on dips” opportunity. The third quarter of any financial year (October – December) has traditionally been a low profit period for Indian banks. Adding to the off-target performance of most banks during this period in FY 2014-15, are the returning concerns about the strength of the Bull Run that seems to have been set off by the NDA’s accession to power at the centre. It is quite important to note here that apprehensions regarding the likely announcements in the Union Budget later this month are also weighing down investor sentiments.

Earlier this month, HDFC Bank raised about INR 9,880 crore in what is being considered as one of the largest equity sales by a private entity in the secondary markets. Following closely, Axis Bank also has announced its intentions of raising about INR 15,000 crore by sale of debt securities to select investors. While it is still not clear how these funds shall be utilized, the equity of these banks still remains buoyed on expectations of developmental spending and strengthening of these banks.

One thing however remains clear. Investment into bank equity is far from “safe”. The risks undertaken as a result of extensive market research and study of the bank’s financials are likely to pay off while a blind investor is likely to lose much. A number of eminent fund managers in India also believe that while the banking sector is likely to be subdued over the next two quarters, long-term investors stand to gain immensely.

Any prediction about the future of the banking sector stocks remains incomplete without a mention of RBI’s monetary review. The central bank’s policies are likely to play an important role in the rise and fall of banking stocks in the months to come.

Top Indian Banks for Investors

PSU Banks –

  • State Bank of India – With over 14,816 branches in the country and with a presence in 34 countries, the SBI is the nation’s largest state-run bank.
  • Punjab National Bank – Better known as PNB, the bank has over 6,300 branches in the country. PNB is known for its Corporate Social Responsibility initiatives.
  • Bank of Baroda – A century old legacy of trust and efficiency has had this bank running. Bank of Baroda has about 4,913 branches all over India.
  • Bank of India – With over 4,828 branches in India and a considerable global presence (54 branches), Bank of India is another PSU bank to watch out for.
  • IDBI Bank – With about 1,602 branches, IDBI Bank is known for its development agenda. Over the past few years, IDBI has been on a strong growth path.
  • Canara Bank – Originally founded in 1906, Canara Bank now has 5,507 branches and is known for its strong tech-savvy approach.

Private Banks –

  • ICICI Bank – The ICICI bank celebrates 60 years of its existence this year. With about 3,845 branches in India, it is one of the trusted private banks of the nation.
  • HDFC Bank – Though set up as recently as 1994, HDFC Bank is another private bank with over 3,250 branches in the country and another of the investor’s favourite.
  • Axis Bank – Also set up in 1994, Axis bank has been quick to gain the trust of both customers and investors. Axis bank has about 2,402 branches in India.
  • Kotak Mahindra Bank – Currently the fourth largest private bank in the country, Kotak Mahindra Bank recently merged with ING Vysya Bank and has about 641 branches in India.


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