Banking Sector: A Betting Sector

The present state of someone who has invested in the Indian Banking sector post the budgets is very much like someone who have bought a lottery ticket or have placed bet on a Derby horse. The reward if the luck favours are huge and so also the risk of getting your capital eroded.


However, at Peter Lynch says "Although it's easy to forget sometimes, a share is not a lottery ticket... it's part-ownership of a business"

That's precisely my view is related to the Indian banking sector. On one hand it has plethora of problems that was created by the Budget 09:

• A higher than anticipated raising the fiscal deficit leading to a higher bond yield and thus pressure on the treasure income
• The finance minister has also said that the banking and financial services
  companies will not be considered for the process of disinvestment, this will
  also lead to a dearth of the much needed capital to comply with the
  applicable BASEL II norm
• The government has increased the amount of necessary allocation for
  banks to underdeveloped sections of society, these kind of loans are likely
  to put strains on their balance sheet and profitability
• A combination of reduction in interest rates, extension of payment dates for the loans made to the agricultural sector

These issues are really hurting the banking sector and has already resulted in a more than 1000+ points fall in the bank nifty index and is expected to continue. Moreover given the high beta and expensive valuation the sector carries, any correction in markets will lead to a blood bath in the banking stocks.

However on the positive side, the banking sector is expected to deliver the best first quarter results among all the other sectors and the performance by Axis Bank and HDFC bank clearly shows the trend. This is mainly on account of a huge increase in treasury income (YoY basis) and a lower cost of funds because of a cut in the key rates over the previous year. Thus if the this continues the upside potential for the banking sector is pretty good.

Hence, the reward comes with a very high risk. I believe that the ones who love adventure sports could go long in the banking sector with a short term view, but ones who want to play safe should avoid this sector or could go short also, the risk here is a less than going long.