Hi guys,
My name is Manhar and today I am going to write on the opportunity I see in the banking industry.
Currently or GDP is 2.7 to 3 trillion dollar. According to IMF report India might reach the 5 trillion mark by fy 2026-27.
Now I have just observed a very interesting fact here. Our credit to GDP ratio is somewhere close to 50% or 60% and when I compare this with USA,JAPAN,CHINA all of them have close to 200%.
My overall broad view here is that once we reach 5 trillion we are going to have this percentage close to 70%-80%.
That means current credit is 1.48 trillion( I might be wrong here) and by fy 2027 it is going to be 3.5 to 4 trillion. So this comes out to be a 20% CAGR growth over the next 5 years.
How are we going to achieve this 3.5 to 4 trillion. My overall broad level understanding here is.
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Once the economy starts growing. There is a growth in the overall demand in the country and since there is a growth in overall demand in the economy company will want to increase there production capacity, they will start doing more capex and this capex is going to be funded by banks.
Now if you see economy can only grow if GDP grows and GDP can only grow if inflation is low and if inflation is low the RBI rates are going to be low and if RBI rates will be low the loan rates will be low. Since the cost of money will be very cheap when an economy grows it is a sort of incentive for companies to take more and more debt.
Company start taking more and more leverage and do capex to fulfill the demand. They make lots of profit and pay lots of interest on that.Since the companies get so highly leveraged once there is some crises it bursts like a bubble (currently what is happening with china in real estate space).
Now if you try connecting the dots you will see most of the banks shifting their advance MIX more towards retail and MSME and trying to reduce the corporate exposure because most of the banks can see this.
I am slightly going off topic please don’t mind, another major reason is the MSME segment is going to outperform in this growth phase and you can also see government backing this sector heavily. -
One of the major reason that our credit is too low is because most of the people in India are not included in the banking system.
GOI of India is taking big steps for the inclusion of maximum people in banking system. Like the PLI scheme, introduction of RUPAY, Preffered lending and many more.
An economy cannot grow without backing the financial sector and government of India is exactly taking the right decision in this space.
How is it going to benefit banking industry,
If you see closely everything is linked. Once the demand grows company start producing more, which results into more profit. More profit increases more employment and salary and more salary and employment results into more spending.
The savings of people start increasing when an economy grows. Per capita income goes up. All this excess money with people goes into the Banks.
Now if feel a good bank can easily grow their Liability side by 15% to 20% every year for the next 5yrs and advances by 12% to 15%.
This was an example of a good bank an aggressive bank can do a lot better because there is heavy sectoral tail wind here.
How can you make money out of this
During this fall if you have observed nifty is down by 18% and bank nifty by 22% from their all time high. Generally this ratio of nifty bank nifty fall is 1.5 to 2 times. But this time bank nifty is holding.
This time the private banks have given close to 91000 cr of net profit highest till date. Currently bank nifty is trading at a PE of 16. I feel most of the private banks are available at good discount.
1 If you are not good at investing and analyzing companies just buy BANKNIFTYBEES and forget it for next 5yrs. You CAN make around 12% to 13% CAGR for next 5yrs.
2.Want to make a little more money invest in top private banks or mid sized banks.
3 If you want to take the complete advantage of this opportunity invest in Small finance banks/NBFC whose major lending is to MSME and retail segment. I feel these small finance companies/NBFC can grow their loan book by 2x or 3x in next 5yrs. Big opportunity here.
Most of you might have a question that one bad loan by a bank can completely change the narrative.
I feel this is the major reason most of the banks are making their loans more granular and diversifying their risk. And I also feel that if the economy does good then companies make lot of profit and the chances of default decreases. But yes as I said one big crisis can have a big impact on banks but even this problem gets tackled as the banks will make lot of money in the next few years their balance sheet strength increases so during crisis the stronger banks are able to absorb such shocks.
Overall I feel this sector has a big opportunity and seeing the current valuations it makes it even more attractive. Please do your research before investing in any of the companies.
I would be very happy if @ diffsoft shares his view on this post. I really admire him a lot. Would be very happy if he can share his views here.
I have a request from moderators to not delete my post once again. This topic is a new topic but if you find this should not have been made please merge to some other topic but please don’t delete it.
I have gone through the community guidelines about 10 times now. Please don’t delete it. Thankyou
Just forgot I have one more point to add here. If you see historically after every US recession the Indian economy has done phenomenally good. I am investing in INDIA growth story are you going to.
Thankyou once again
)!!