Yesterday we talked about stock market being compared to gambling. Considering the uncertainties of the market, that comparison may be alright at times. The proportion of losers in the stock market is almost similar to the losers at casinos.
But to call Banking Business as gambling would be audacious.
The current state of banking in India has poised this question.
Few months ago, I had written this:
Banks are meant to be a profitable and good business.
The business is simple. Get money from people at a cost. Lend it to other people at higher rate of interest than the bank pays on deposits. The difference should be enough to take care of the expenses ( salaries and establishment expenses ) and deliver a net profit.
But in modern times, simple things get complicated.
Governments start interfering with the banks’ working. Banks are made to give loans that are not viable and to the borrowers without good credentials. In India, we had Loan Melas in the time of Rajiv Gandhi’s government which was a brainchild of Janardhan Poojai, MOS Finance.
Presently we have MUDRA loans.
These type of loans along with the frauds like Nirav Modi or bad loans like Kingfisher Airlines, Jet Airways, Air India, Reliance Communication, Vodafone Idea, Bhushan Steel and many more sit heavily on the banks’ balance sheets.
In the present state of affairs Bank Stocks in India are not a good long term investment.
Banking and Gambling:
When someone invests in a stock , it is actually buying a stake in that business to the extent of your shareholding. Price of a stock is the market’s assessment of the company as a business.
But the wild fluctuations in the share prices of few banks will lead us to believe that it is all a scam.
Nobody has a clue why they are buying or selling a stock ( specially banking stocks ). With all the research, data and number crunching available with them, the big financial institutions too are as stupid as you and me.
Before you question me on this statement, have a look at the performance of your mutual fund investments over last two years. These funds are managed by the so called smart people in the market.
Let us have a look at the price fluctuations in YESBANK over last few days ( before and after the FPO ):
In 10 trading days, the price is down by 40%.
Is it how a stock of a banking stock should be trading?
We shall get stupid and funny answers like — The price went down due to increased supply as the FPO shares came into the market.
Did the smart guys not know that new shares will be in the market in next 3-4 days when they were buying at Rs. 19.95?
We always hear people saying — Market knows everything.
Why the market did not know this?
I talked to many people in the days before FPO that there is no point subscribing to it. The stock may go up for a day but then it will keep moving down. Any business which is collecting money from the market just to survive, why people expect it to flourish and give good returns?
That is a gamble.
That is why banking is now like ganbling.
Most of the banks are playing with the depositors’ money by making dubious loans, hiding the non performing loans ( it is stupid to call such loans as assets ) and come to government for more money to continue doing the same things again.
In their heart, all the big players know it. That is why banking stocks take a bigger hit when the market makes a down move.
But in the name of market, we are having huge gambling going on ( all of us are part of this scam — RBI, SEBI all are party to it by their lack of regulation or lax regulations ) all the time.
We shall see how the market has moved over last 1 year and how the banks have performed.
NIFTY is down just – 0.40% for the 365 day period.
But BANKNIFTY is down 25.06% over same period.
In the above chart HDFCBANK is wrongly shown as down 54.11%. It had a 1:1 split in September 2019. That still makes it a losing stock.
All the 12 are losers but it does not tell the complete story. One of the biggest losers YESBANK has been excluded from the index. That way index stays healthy while investors keep on losing.
While the BANKNIFTY was down 25%, the PSUBANK Index really did a good performance. It fell 48%.
This is a telling commentary on the sad state of affairs in the banking industry in the country.
Market is telling the story repeatedly but the gullible investors who are being led by the pied pipers speaking everyday on business channels are not listening.
They keep hoping that YESBANK will come back again to Rs. 50, Rs. 100, Rs. 200, Rs. 300 depending on when they got trapped.
The dream will remain just that and the stock will continue the journey from 60 to 50 to 40 to 20 to 12 to 10 to 8 to 5 to finally Rs. 2.00.
Do not bank on the banks.
They are not even being run as casinos. Or maybe they are like Donald Trump ran his casino — Trump Tajmahal — and led it to bankruptcy.
Thanks for reading.
Enjoy your Sunday.
Disclaimer: This post and examples are for teaching purpose only and are not meant as advice/suggestion to trade in these stocks. Trading in Futures and Options can lead to big losses and should be done with appropriate knowledge and advice only. Mentioning the stocks here does not imply that I have a trading position or likely to take a trade in these stocks.