It is easy to look at the flood of bad news that has come in the banking space, and be scared. It is easy to worry about all the bad loans that are yet to be recognized. It is easy to see banks requiring a huge amount of capital infusions to even meet norms, let alone grow their businesses.
But in all of those things, there are a few things people aren't seeing.
- Banks are getting a lot of help from new laws that are being passed to make it tough for promoters to escape from their obligations, and to make it easy for banks to recover their money. Today, India has moved decisively away from the BIFR era into a Bankruptcy era. If you cannot honor your obligations, then the system is now geared to shut you down quickly and cleanly - not to help you survive and drag things along forever.
- Over the last decade or so, banks have made significant provisions for bad loans. And the new laws that are being passed today will be as applicable to these old bad loans as to fresh ones. So while people are worrying about fresh bad loan disclosures, not one person is thinking of the impact to bottom line when these old bad loans are pressurized to repay because of the new initiatives. That money has already been written off, and when it is repaid, it goes straight to bottom line.
- Promoters are today preparing to sell off assets, preparing to bring back money stashed away overseas, and in short, do whatever it takes to hold on to their companies. They know the writing is on the wall - if they don't pay, they lose their companies. Many of these steel, power, mining and other companies are real businesses - and if India is going to grow economically, these businesses are critical. No promoter is stupid enough to lose his company today, if there is any way he can avoid it.
- RBI has held off on lowering rates to some extent, because they want banks to make real efforts towards solving the problem. They don't want banks and borrowers to get a Get-Out-Of-Jail-Free card, because of lower rates. But as RBI gets a sense that banks and borrowers are making serious efforts to solve the problem, the RBI will step in to lower rates. Lower rates make it much easier to service debt obligations, and will help hugely.
- In any case, whichever way you see it, it is fair to say that all the bad news has been priced into Bank share prices. Even if there are fresh disclosures of bad loans, we are already worried about that, so we need to assume that share prices have already factored in those worries.
- If the Indian economy is going to perform well, and if India is going to grow, it is simply inconceivable that this can happen without banks participating strongly in the process, and without banks benefitting from the process. Unless you are writing off the long term economic story of India, you have to expect that banks will recover solidly from current levels.
- Most of the big banks today, like SBI and ICICI have made investments in subsidiaries in life and general insurance, which aren't yet making full contribution to the bottom line. We all know that India is massively under-insured, and even middle class and upper middle class Indians are under-insured! These businesses have nowhere to go but up. And whatever may be the current hiccups, these will all be resolved sooner or later. At some point these subsidiaries will be listed publicly, and the value in these subsidiaries will be unlocked.
- it is only in times of crisis that you will see big banks become multi-baggers. Those who invested in Citibank shares at $5 per share in 2008-09, have made 10x in just 8 years! But in general, it is better to be greedy when everyone else is afraid, and afraid when every one else is greedy!
But in all of those things, there are a few things people aren't seeing.
- Banks are getting a lot of help from new laws that are being passed to make it tough for promoters to escape from their obligations, and to make it easy for banks to recover their money. Today, India has moved decisively away from the BIFR era into a Bankruptcy era. If you cannot honor your obligations, then the system is now geared to shut you down quickly and cleanly - not to help you survive and drag things along forever.
- Over the last decade or so, banks have made significant provisions for bad loans. And the new laws that are being passed today will be as applicable to these old bad loans as to fresh ones. So while people are worrying about fresh bad loan disclosures, not one person is thinking of the impact to bottom line when these old bad loans are pressurized to repay because of the new initiatives. That money has already been written off, and when it is repaid, it goes straight to bottom line.
- Promoters are today preparing to sell off assets, preparing to bring back money stashed away overseas, and in short, do whatever it takes to hold on to their companies. They know the writing is on the wall - if they don't pay, they lose their companies. Many of these steel, power, mining and other companies are real businesses - and if India is going to grow economically, these businesses are critical. No promoter is stupid enough to lose his company today, if there is any way he can avoid it.
- RBI has held off on lowering rates to some extent, because they want banks to make real efforts towards solving the problem. They don't want banks and borrowers to get a Get-Out-Of-Jail-Free card, because of lower rates. But as RBI gets a sense that banks and borrowers are making serious efforts to solve the problem, the RBI will step in to lower rates. Lower rates make it much easier to service debt obligations, and will help hugely.
- In any case, whichever way you see it, it is fair to say that all the bad news has been priced into Bank share prices. Even if there are fresh disclosures of bad loans, we are already worried about that, so we need to assume that share prices have already factored in those worries.
- If the Indian economy is going to perform well, and if India is going to grow, it is simply inconceivable that this can happen without banks participating strongly in the process, and without banks benefitting from the process. Unless you are writing off the long term economic story of India, you have to expect that banks will recover solidly from current levels.
- Most of the big banks today, like SBI and ICICI have made investments in subsidiaries in life and general insurance, which aren't yet making full contribution to the bottom line. We all know that India is massively under-insured, and even middle class and upper middle class Indians are under-insured! These businesses have nowhere to go but up. And whatever may be the current hiccups, these will all be resolved sooner or later. At some point these subsidiaries will be listed publicly, and the value in these subsidiaries will be unlocked.
- it is only in times of crisis that you will see big banks become multi-baggers. Those who invested in Citibank shares at $5 per share in 2008-09, have made 10x in just 8 years! But in general, it is better to be greedy when everyone else is afraid, and afraid when every one else is greedy!