Should one invest in banking stocks now?

Savings account deregulation is a fresh challenge that is emerging for all the banks and particularly those banks which has high CASA ratio as there will be compression in NIM once this regulation is implemented. Already banking stocks in India were at the top end of the Interest rate cycle 9 months back when the entire regime of loose monetary policy was about to end and RBI became hawkish on Inflation and started increasing rates. 

In an article dated 1st FEB 2011 "Banking stocks injured by tripple edged sword"  it was discussed how the pain on asset quality and lower NIMs will start getting reflected from the 4th quarter of FY11 onward which will take at least 6 to 9 months to bottom out. Only then the investors having 1 to 2 years of investment horizon should enter into quality large cap and mid cap banks. There is still enough pain to be witnessed by bank stocks going forward. So fresh allocation in bank stocks at this point of time should be avoided until both time and price correction happens and valuation on 1 year forward basis is compelling.

Indian Bank stocks - Injured by the tripple edged sword

During upside banking sector in general outperformed SENSEX and NIFTY by wide margin and at the peak their weightage in the indexex went to as high as 30% which was clearly non sustainable because of two major reasons, one was obviously the overvaluation and other was the overownership.

98 out of 100 people were bullish and invested in one or the other bank stocks and analysts were busy defending the relative valuation of the bank stocks they were invested in inspite of the fact that on absolute terms all of them were trading at the upper end of their lifetime valuation. When we chase something blindly we tend forget the basic principles of investing again and again. Interest rate has been continously rising since last 1 year and by the sheer nature of the banking business rising interest rates are fatal for them. The credit growth slows down, NPAs start cropping in and the bond prices come down which reduces their treasury profits. So a rising interest rates acts like a tripple edged sword for banks. Every cyclical business should be avoided when the cycle is about to turn. With rising interest rate the interest rate sensitive sectors such as Banks & Auto were clearly sell but inspite of that fact analysts kept on recommending both to the investors and they have burnt their fingers badly.

Investors should avoid bottom fishing the bank stocks at this point as the march quarter is going to be the first quarter of painful result. The price correction might stall after 10 to 15% fall from current levels for large banks but the time correction is due. The interest rate cycle will take at least one year to top out and thus the ideal time to look at quality bank stocks would be at least 6 months from now. The investors then should have the investment horizon of at least 2 years to get some meaningfull return.