Keep aside Yes Bank, RBI and the recent controversies for a moment.
Charlie Munger had the following to say about financial companies: “Where you have complexity, by nature you can have frauds and mistakes… this will always be true of financial companies, including ones run by governments. If you want accurate numbers from financial companies, you are in the wrong world” . The fact is, financial statements of banks are inherently non-transparent and difficult to analyze. This is because of the very nature of business and the way accounting is done – decisions taken today whose fate will be known several years later, use of estimates to value assets, accounting of income on accrual basis, lack of relevance of cash flow statements, heavy leverage and so on. All of this is true even in the cleanest of markets. Add to this the Indian context – inherently poor governance standards, absence of fear of law enforcement, lax regulators, corruption and so on, and you never know what you are staring at.
Over the years in their quest to find the “next HDFC Bank” (or Bajaj Finance, for example), investors have latched on to one finance company after another. But even these companies are pristine only until – until they are not. I doubt if there is any long term investor who not only correctly identified these multi-baggers in advance, but correctly stayed away from all other false starts (the “next” HDFC Banks). Their outcome says nothing about the process used to identify the stock.
It is not without reason that though there are thousands of books on how to pick the right stocks, there is virtually no literature on researching and picking the right finance companies. At best, investing in finance companies is a sectoral call. At worst, it is just a shot in the dark.
(Disclosure: No exposure in any finance company, no opinion on any specific company mentioned above)