Indian Banking Stocks

The week, 18th July to 23rd July 2011, again assumes importance for the banking stocks, with a number of private banks like HDFC, KOTAK and YES banks coming up with their quarterly results. No doubt that the sector has been on a roll for the past couple of years. In fact after the slow down in 2008 and 2009, the banking index has delivered a return of 82 percent (between May 2009 and October 2010), compared to a return of 40 percent delivered by the broader market. In 2009/10, banking was the safest bet as people had concerns about investing in other sectors like telecom, power, real estate, oil and gas. This was also due to the strong credit quality of Indian banks, which proved them resilient during the crisis.

The banking stocks got beaten down due to reduced credit off take, pressure on yields, which is flowing into valuations causing downgrades in this sector. Since November 2010, the bank index has underperformed compared to Nifty. With RBI hiking its key policy rates in each of its monetary policy announced in last year and more, there has been an overall increase in the lending and deposits rates. As interest rates raise credit growth moderates. In fact the credit growth has come down from 23.3% in January this year to 21.9% in April. Despite this some private sector’s banks’ performance is not that bad. It’s the public sector that is more out of the sync. The biggest disappointment has come from SBI. It declared a 99% dip in profits for the quarter ending March 31, 2011, due to provisioning on teaser loans, providing for pensions and gratuity shortfalls and higher NPA. There could be similar stories in other PSBs too.

THE STOCK BROKING IS STRUGGLING

The figures of earnings are showing that the brokers are not fairing well at all in 2010-11. Not only the revenues due to lack in retail volumes have dried up, the IPOs a big revenue earner for retail broking are too disappointing. A lot of companies have shut shop, especially the Institutional or Retail or both too. The dearth and high cost of talent is another factor. All these are very obvious quantitative factors.

The most important constraint the brokerage industry faces is penetration and training. No single brokerage house has concentrated on these two very important long term factors. The acquisition staff is under trained and at best knows how to get an account open. Equity being a serious risk taking effort needs special attention to account holders and therefore a bit of special equity training to staff to handle clients. This one aspect is completely missing in the industry. And this could be determined by the number of inactive clients that each broker has.

Related to lack of training is the penetration issue. The equity market is not growing at a pace desired in an ever growing Indian economy. People lack knowledge and therefore trust and are afraid. Yes, this industry really needs “Preachers” more than anything else. People need to be converted and taught the religion of Equity, an asset class which cannot be ignored by the middle class of India.

Not only the broking houses but the stock exchanges, government and educational institutions too are not spreading the message of Equity. Market risk is perceived to be a synonym of complete loss in this asset class. Its high time that people associated with this industry perform a Satyagrah, and make others understand that it too is a field of  respect and knowledge.

Europe Up for Sale

With emergency session of euro finance chiefs in Brussels yesterday failed to break a deadlock on how to enroll investors in a second bailout without triggering a default, casting doubt on funds due from the International Monetary Fund next month darkens the economic prospects for Euro Zone. With tiff between France and Germany on bailing out Greece getting stronger the credit rating on Greece bond was cut to lowest in the world by S&P on 13^th June. In absence of any bailout package Greece is left with no other option but to default on its payments. As Euro zone ministers failed on Tuesday to reach an agreement on how private holders of Greek debt should share the costs of a new bailout.

Greece to be Bailed out again

A little more than a year after its first bailout and Greece is preparing itself to get another bailout of $113 billion from IMF. When Greece was given a bailout in April 2010, nobody would have thought that soon Greece will require another bailout. Greece has not yet recovered from the financial crisis of 2008. All the major banks are making losses and and now even the credit rating for banks has been downgraded by Moody’s . Moody has raised the chances of a Greece default to 50%  this has further worsen the situation as investors has lost hope in the Greece economy and are pulling their money out of the economy. To prevent Greece from a possible default European Union and International Monetary Fund has revised a plan for $113 billion in asset sales and austerity measures. Since the time this bailout is announced euro currency has gained substantially and this is indeed a much needed bailout for Greece. Without this bailout Greece would default and this will have a catastrophic effect not only on European countries but the whole economy. This bailout will help Greece recover from its financial crisis and will strengthen the Greece financial sector.

THE GREAT RECESSION (1973-75) AND ITS EFFECT ON U.S ECONOMY

U. S economy which is regarded to be the most developed economy of the world has the history of facing recessionary conditions. After the great depression of 1930, and two world wars that affected the economy at a great deal. American economy has witnessed as many as ten recessions, but the recession of 1973-75 was the worst as country was in the growth process and recession was the biggest hindrance in the path of growth. There are some factors which directly affect the growth of the country; some of them are capital formation, taxation, growth rate of gross domestic product, investment purchase and the three sector model that the economy follows for savings and investment. Generally the flow of capital is very important, and saving and investment play a very important role. If savings is less than investment then capital formation is more, hence mobilization is done properly, generally the savings and investment should be in equilibrium to support growth and enhance capital formation in the country.