January 2, 2006

Some thoughts on banks and their retail portfolio

Found an interesting view on indian economy from the ‘Morgan stanley GEF’ website

Some interesting observation in the article

We believe that a large part of the recent growth in industrial production and to a lesser extent services sector growth has been driven by cyclical global factors. A sharp fall in real interest rates since 2000 has encouraged both the government and households to borrow aggressively.


Acceleration in consumption growth has largely been driven by a rise in borrowing rather than income growth. Strong domestic consumption has been one of the key factors pushing the combined growth of industry and services sectors, which has averaged 9.3% over the past four quarters.

Second, rapid growth in leverage is also resulting in more credit risk in the financial system. Our banks team sees a rising credit risk building in the system as Indian households have leveraged significantly above the fair level that is supported by the current trend in per capital income. The central bank also relayed similar concerns.

The above makes you think about the valuation of banks which are showing strong profits and very low NPA. For Ex: ICICI bank has brought down NPA from 4%+ to below 1%. What are the kind of risks these banks have on their balance sheet due to their aggressive retail loans ? Somehow retail loans are now seen as low risk, high return and high growth area for most of the banks. As a result there has been a substantial growth of the retail portfolio. Maybe the overall risks are low (atleast the market has priced the bank stocks accordingly). The problem with bank loans is that these problems can remain hidden for a long time. As buffett as ‘Its only when the tide goes out, that you realise who has been swimming naked’

1 comment:

Shankar said...

Rohit, help me in arriving at a sustainable valuation model for banking sector. Debt recap / NCA will not work here. I can only think of P/E ratios but then this works on the whims and fancies of interest rates. Any guesses ?

Rgds, Shankar