First Global
Why are India’s Private Sector Bank Stocks tanking?

ICICI Bank has lost 45% in the past 60 days. Axis Bank is down 43%. HDFC Bank is down nearly 25%. What’s going on here? Well, what’s going on is that the market is getting really nervous about the quality of their loan books. Remember, Indian private sector banks have been on a tear last few years. Great asset growth. Great earnings growth.

Precisely the kinds of things that make me lose sleep. I just hate fast growing banks. I operate with the simple-minded belief that any bank that does that comes to grief, sooner or later. Banking is arguably the dumbest business known to mankind, and a fast growing bank is the dumbest beast in the jungle.

The only model of banking that makes sense to me is a small, focused, narrow footprint bank, where the CEO knows every borrower, runs a dull, boring business that trades at book value.

Any other model will self-destruct at some point. Citigroup exemplifies this self-destruct model, having lived on the edge for over 20 years. It survived its last brush with bankruptcy thanks to Alwadeed, who must surely rank as an even worse investor than what Warren Buffet has lately become.

Indian Private Sector Banks have grown on all fronts last five years (the same 5-year syndrome again!). But surely this breakneck growth must have given birth to some warts that will show up when the cycle turns down?

For sure. First Global’s Banking Analysts highlighted this risk in a
report “Banking: Food for Thought - How serious is the threat to the loan book of Indian private banks? (Sector downgrade)” dated November 28, 2008.

The key points that were highlighted in that note (which also downgraded all the major Private Sector Banks like ICICI, Axis and HDFC Bank): “Exposure to real estate alone was 175% of Net Worth for ICICI Bank, 180% for Axis
Bank and 88% for HDFC Bank…and this was after the serial fund-raisings by all of them..…plus there was significant exposure to other cyclicals like steel, textiles, et al.

Unsecured loans were (and probably still are) are between 112-165% of tangible networth. Total Sensitive Sector exposure + Unsecured lending, of these banks is: 305% of Tangible Net Worth for ICICI Bank; Axis Bank has the same ratio at 316% of Tangible Net Worth; and HDFC Bank, 292% of
Tangible Net Worth. Sensitive Sectors are Real Estate and related sectors + Capital Markets”.

Mind you, this ratio excludes exposure to other troubled sectors like Gems & Jewellery, Textiles, Steel, etc. Do the math or just send us a mail for our November report. It does not make for pleasant reading, though, I must warn you.

The above ratios are the key to understanding why we turned outright bearish on these names a while back. Looking at the above numbers, our take was that there was no way the lofty 2-4x Price/Book of these banks would last. Their book values will take some hits in the coming months, and that is precisely what the market is saying through its price action on these names. So don’t
start getting carried away by the usual sell-side rubbish about how attractive these banks are at these P/BVs.

The Other Important thing to remember
When folks start talking about the security of the Indian banking system (and of course, it is fairly secure…so far), and how it weathered the ’98 Asian crisis so well, bear in mind one very important thing: back in ‘90s, there were virtually no Private Sector Banks of any size or consequence around:

HDFC Bank was barely 2 years old at the time of the Asian crisis, Axis didn’t exist, ICICI Bank was still a development bank. It is since 2002-03, that Private Sector banking has become the dominant force in Indian Banking, on an incremental basis: their business has grown at CAGR of 34% last five years, vs 25% for the entire Indian Banking industry.

And we all know Private Sector Banks take far higher risks than state-owned banks. This is precisely my worry about India’s banking situation: in the ‘90s, the state-owned banks ran relatively conservative banks. In this decade, the risk-meter has swung more to the right, what with the Private Sector Banks’ pressure of quarterly numbers, growth, and the desire to impress the Street. None of which, generally speaking, makes for sound banking practice.


Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

Nothing in this article is, or should be construed as, investment advice.
= = = = = = = = = = = = = = = = = = = = = = = = = = =

I have no idea on this just posting......... is FIRST GLOBAL IN BEAR CARTEL?

Originally posted by chimak10 First Global Why are India’s Private Sector Bank Stocks tanking? ICICI Bank has lost 45% in the past 60 days. Axis Bank is down 43%. HDFC Bank is down nearly 25%. What’s going on here? Well, what’s going on is that the market is getting really nervous about the quality of their loan books. Remember, Indian private sector banks have been on a tear last few years. Great asset growth. Great earnings growth. Precisely the kinds of things that make me lose sleep. I just hate fast growing banks. I operate with the simple-minded belief that any bank that does that comes to grief, sooner or later. Banking is arguably the dumbest business known to mankind, and a fast growing bank is the dumbest beast in the jungle. The only model of banking that makes sense to me is a small, focused, narrow footprint bank, where the CEO knows every borrower, runs a dull, boring business that trades at book value. Any other model will self-destruct at some point. Citigroup exemplifies this self-destruct model, having lived on the edge for over 20 years. It survived its last brush with bankruptcy thanks to Alwadeed, who must surely rank as an even worse investor than what Warren Buffet has lately become. Indian Private Sector Banks have grown on all fronts last five years (the same 5-year syndrome again!). But surely this breakneck growth must have given birth to some warts that will show up when the cycle turns down? For sure. First Global’s Banking Analysts highlighted this risk in a report “Banking: Food for Thought - How serious is the threat to the loan book of Indian private banks? (Sector downgrade)” dated November 28, 2008. The key points that were highlighted in that note (which also downgraded all the major Private Sector Banks like ICICI, Axis and HDFC Bank): “Exposure to real estate alone was 175% of Net Worth for ICICI Bank, 180% for Axis Bank and 88% for HDFC Bank…and this was after the serial fund-raisings by all of them..…plus there was significant exposure to other cyclicals like steel, textiles, et al. Unsecured loans were (and probably still are) are between 112-165% of tangible networth. Total Sensitive Sector exposure + Unsecured lending, of these banks is: 305% of Tangible Net Worth for ICICI Bank; Axis Bank has the same ratio at 316% of Tangible Net Worth; and HDFC Bank, 292% of Tangible Net Worth. Sensitive Sectors are Real Estate and related sectors + Capital Markets”. Mind you, this ratio excludes exposure to other troubled sectors like Gems & Jewellery, Textiles, Steel, etc. Do the math or just send us a mail for our November report. It does not make for pleasant reading, though, I must warn you. The above ratios are the key to understanding why we turned outright bearish on these names a while back. Looking at the above numbers, our take was that there was no way the lofty 2-4x Price/Book of these banks would last. Their book values will take some hits in the coming months, and that is precisely what the market is saying through its price action on these names. So don’t start getting carried away by the usual sell-side rubbish about how attractive these banks are at these P/BVs. The Other Important thing to remember When folks start talking about the security of the Indian banking system (and of course, it is fairly secure…so far), and how it weathered the ’98 Asian crisis so well, bear in mind one very important thing: back in ‘90s, there were virtually no Private Sector Banks of any size or consequence around: HDFC Bank was barely 2 years old at the time of the Asian crisis, Axis didn’t exist, ICICI Bank was still a development bank. It is since 2002-03, that Private Sector banking has become the dominant force in Indian Banking, on an incremental basis: their business has grown at CAGR of 34% last five years, vs 25% for the entire Indian Banking industry. And we all know Private Sector Banks take far higher risks than state-owned banks. This is precisely my worry about India’s banking situation: in the ‘90s, the state-owned banks ran relatively conservative banks. In this decade, the risk-meter has swung more to the right, what with the Private Sector Banks’ pressure of quarterly numbers, growth, and the desire to impress the Street. None of which, generally speaking, makes for sound banking practice. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. = = = = = = = = = = = = = = = = = = = = = = = = = = = I have no idea on this just posting......... is FIRST GLOBAL IN BEAR CARTEL?

Nice piece!!!

Originally posted by kanagala Originally posted by jain208 Nice piece!!! Very good article. Fair play to FG. They are making the same arguments about pvt banks from the beginning of 2008. Does it mean that  one should not invest in Banking stocks? Banking still looks like a very scalable business in India. These stocks are available at reasonable levels.?

See, the problem is that banks are trying to do more than basic banking in order to produce "growth". I don't say that one should NOT invest in banking stocks, but having a portfolio concentrated in the financial sector may be imprudent for most investors.

Further, the point of being available at reasonable levels  raises the issue of false anchoring.





Edited by Hitesh Shah - 14/Mar/2009 at 9:40pm

Originally posted by Hitesh Shah Originally posted by kanagala Originally posted by jain208 Nice piece!!! Very good article. Fair play to FG. They are making the same arguments about pvt banks from the beginning of 2008. Does it mean that  one should not invest in Banking stocks? Banking still looks like a very scalable business in India. These stocks are available at reasonable levels.? See, the problem is that banks are trying to do more than basic banking in order to produce "growth". I don't say that one should NOT invest in banking stocks, but having a portfolio concentrated in the financial sector may be imprudent for most investors. Further, the point of being available at reasonable levels  raises the issue of false anchoring.

They are available at reasonable levels based on the each stock historic high/low BV multiples. It is not false anchoring. It is based on the numbers i have looked at. I am not saying they are at screaming buy levels. FG wrote this article at the beginning of 2008.

You are right. One should not concentrate on Financial sector. It is very complicated and risky for normal investors.



Edited by kanagala - 14/Mar/2009 at 10:08pm