Banking Sector Post Covid-19

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Before I talk about the Indian banking sector, let me give some brief on Global Banking Sector post dot com bubble burst. After year 2000 crash, to revive the Economy, then-Fed chairman, Alan Greenspan reduced the interest rates to record low at less than 1% to improve the liquidity in the system. All Banks took this opportunity to expand their balance sheets and provide more and more loans to people who had good credit scores. Global banks were in competition to disburse more and more loans, which has created an asset bubble across Real Estate, Gold, Equity and other asset class. Due to this easy liquidity, Global Economy was growing at an unprecedented growth rate from 2003 to 2008. All was good till this bubble burst in 2008. The reason had been sub-prime or what we can say substandard loan books created by banks in their mad race. These loans were disbursed without doing proper due diligence of clients paying capacity. This careless approach by US banks has put the entire World Financial System under stress and had created one of the worst Financial crises post-depression of year 1929. To overcome this crisis, US Fed started printing money recklessly which in turn gave a boost to US Economy by creating more and more debt in Global Financial System. Today this Global debt is close to $ 260 Trillion, which is almost 300% of Global GDP and probably this is the only reason why Global central banks have such a low rate of interest regime so that governments and corporates can serve this debt.

Now let’s move from Global banking to the Indian banking system. Indian banks also had the same trend line as US banks from 2003 till 2008 and their balance sheet expanded with the expansion of India’s GDP. In that booming era, lot of loans were given to Infrastructure, Aviation, telecom, power and real estate companies. However, after the 2008 global financial crisis, a lot of these loans were restructured to avert NPA cycle by banks. This was probably a good step in short term to postpone the problem rather than solving it forever. Post-2012, India’s GDP also started declining, hence all loans given to the above sectors start posing a big risk to the banking sector in India.

In 2016, demonetization and new RERA guidelines further slowed down the cash flow in the economy, hence India’s GDP growth rate was the lowest ever in 2019. Today India’s banking Sector loan book is close to INR 97 lakh crores, out of which 9% to 13% has exposure to those sectors, whose business model become unviable in the last 13 years. This may be an overhanging sword to the Indian banking system going forward. We have already seen Yes bank and some other cooperative banks went bust due to the above-mentioned challenges. To share a broader view, the entire banking sector has a Capital of 11 to 12 lakh crore, if above mentioned risky sectors have 40% NPA’s, then half of the Banking Industry Capital shall be wiped out.

Amit Jain - Ashika
Amit Jain – Ashika Wealth Advisors

I believe, post Covid-19 era, this situation may go worse, as we don’t have power like US Fed to print fiat money without depreciating our currency, hence I am very cautious about this sector post loan moratorium period ends. Also, at the current lower level of repo rates, bank treasury income shall also be under check.

If you see globally, banking is a zero-sum game, they grow with an expansionary balance sheet of Economy and bust with a decrease or stagnation in growth rate. What banks call an “Asset” in a bull phase becomes a “Bad asset” in a bear phase. My view is strictly from the sector’s point of view, however, I am not commenting on their share price by any means, as there are some different factors that play in the stock market. However, for reference, I am happy to share below stock price performance for some of the Global banks which still exist after the 2008 financial crisis. For Investors quick recap, from 2008 till 2012 almost 400 banks were declared failed in the US Economy by FDIC. Hence one should be cautious of being too casual with banks.

Name of the Stock Price in 2001 Price in 2020 % Change CAGR
JP Morgan 43 98 128% 4%
Goldman Sachs 96 180 88% 3%
Wellsfargo 24 31 29% 1%
Bank of America 22 24 9% 0%
State Street Bank 62 60 -3% 0%
Morgan Stanley 64 40 -38% -2%
Bank of Network Melon 58 36 -38% -2%
Citigroup 492 46 -91% -11%

Just to conclude, if the right steps to attracts foreign capital are not taken by the government now, then It can be India’s “Lehman moment”. In the last 16 years, we have seen banking and NBFC stocks perform well, however now, it looks it is time invested in ARC’s from a medium-term perspective.

Article By – Mr. Amit Jain, Co-founder & CEO, Ashika Wealth Advisors

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