I am presenting a contra view in this discussion. Negative on Banks & HFCs and positive on Credit rating & Insurance companies.
Mr R Balakrishnan has written a very good article in Moneylife on “Valuing Bank Stocks”. He argues that the private sector banks are probably overvalued and public sector banks impossible to value. His basic thesis is that given the low ROEs from the banking sector (the best bank gets about 20% ROE), we are paying way too much for banks where the asset quality is presumably good. PSBs suffer because if the true bad debt recognition happens, there may not be any earnings left to compute ROE. Other stalwarts like Ramesh Damani and Porinju Veliyath also have a negative view on banking sector.
But that is not the only reason. IMHO, the economy is yet to turn the corner, the ground level situation is not good - people are not committing new investments, coupled with worsening bank balance sheets because of recognition of NPAs …….. I believe all the banks have so called bad/restructured loans in their books. Once it is classified as NPA (of course, not all of it…), the provisioning increases, denting the Net Profit. This process has begun (albeit after the deadline set by RBI Governor), which will continue for several quarters. I feel banking sector will undergo some pain in the near term.
HFCs : As I have written earlier in Hitesh bhai’s thread, I continue to get negative inputs from friends based in HFCs regarding new mortgage business. Several thousand apartments are lying unsold and the realty sector is in bad shape. However, Balance transfer business continues at brisk pace which ensures that HFCs and banks fighting with each other for lower rates thereby driving NIMs down.
Credit rating companies : The Kingfisher fiasco has raised a question mark on banks’ ability to asses / appraise the loan proposals. IMHO, there will be an ever increased demand for customer ratings by recognized rating agencies. To the best of my knowledge, some of the well run pvt banks have internal rating process by their Credit/Risk Depts. Not sure about the same with PSBs. So I see an opportunity here for increased business for rating companies. Not to mention the low capital requirement, excellent ROEs, good dividend track record and good FCF they generate.
Insurance companies : There is only one pure play listed insurance company as of now and I am positive on the long term potential of this sector because of under penetration in Life Insurance and increasing awareness about Health Insurance (because of rising healthcare expenses).