Is it a good time to invest in Bank Stocks for the long term ? :
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.
My answer is more specific to public sector banks.
This a screen shot from my trades in February 2015:
The two bank stock trades are highlighted.
Five years ago, CANARA BANK was trading at a price of more than Rs. 440.
On Friday, April 17,2020, the closing price is Rs. 86.85.
The biggest public sector bank, State Bank of India shares were trading at a price higher than Rs. 300 five years ago.
On Friday, April 17 the stock price went up considerably after the press briefing of RBI Governor and was quoted at Rs. 193.25.
And five years is a considerably long period of time.
The trend remains the same:
If one keeps on doing same thing and expects different results, it would be foolishness.
But our banks keep doing the same all the time. It is the chatter of the cheer leaders on the business channels who build the hype which makes the stock prices go up from time to time. People start believing that these stocks are good.
Government rushes in and gives a dose of liquidity by way of recapitalization and more people buy these stocks to send the prices higher.
That is when the smart money makes the exit and the general public is left holding the duds.
A big injection of public funds was given to public sector banks in October 2017. Immediately the stock prices shot up. The gains were 25–50% in a single day as if all the problems of the sector were resolved.
Then in August 2019, more money was given to these banks and 10 banks merged into 4.
Let us look at the prices from October 2017 to present.
I have not updated for April 17, 2020 but that is not going to be much different.
Every one of these stocks have lost value in this period in spite of government putting in good money in these banks.
Private Sector :
We do not know who is hiding what.
If there are few good performers like HDFCBANK, ICICIBANK, AXISBANK and KOTAKBANK, we have YESBANK, RBLBANK and INDUSINDBANK which have performed extremely bad.
The sector is troubled already.
Troubles will not go away just by RBI relaxing the lending norms. In fact that will lead to more trouble in the future.
To Conclude :
Banking in present times is not the old sedate method of making money for the business and the stock holders.
It is now a high risk business full of dubious decisions, encouraged by the governments and the regulators to take more risks in the name of ease of doing business. Others are enjoying that easing whereas banks bear the brunt of bad loans and defaults.
The cycle will never stop because the banks are not being run as banks but money giving institutions without expectations of getting it back.
This is a harsh conclusion but unfortunately true.
Neither the banks or the government will accept this harsh truth but truth has a way of finally prevailing and it shows itself in the stock prices after some time.
Banking stocks are not a good investment.
These are my thoughts and views. Readers are welcome to differ.
Thanks for reading.
Enjoy the holiday.
Stay at home, stay healthy, stay safe.