Are You Worried About Falling Bank Stocks?

Fall Bank Shares 2016

I would love to say that all is well and you should not worry. But that is easier said than done. When portfolios are down 15%-20% and banking stocks are down upto 50% in a matter of just few months, any gyan that anyone gives, feels like hurting the financial soul. 🙂
Nobody likes losing money. Absolutely no one.
But markets are like that. It doesn’t owe you a thing. It doesn’t know that you are saving for retirements. It doesn’t care whether your financial goals require money tomorrow or decades later.
And as Michael Batnick of The Irrelevant Investor puts it, [the market] doesn’t care about your wants and needs or your hopes and dreams.
But I am not here to predict anything about short-term. No on knows that. But I am pretty hopeful of one thing. That once the current crisis surrounding the banks gets over, it will lead to emergence of better and more robust banks. I don’t know if government will merge weaker and smaller PSU banks with stronger ones. But the ones that remain in existence (and I am sure most will), will be far cleaner and better equipped to do their businesses than their previous avatars.
You can accuse me of being an optimist here. But as an investor, that is what one must be. I am not saying that don’t be a realist. But when everything is falling around, there will come a point when some of the bank stocks will look attractive from long-term perspective. I know that with new banks coming, its only a matter of time that government-backed banks will have their market share eaten up. But the value destruction that is happening now in PSU bank stocks will stop somewhere. Most of them are not going to go to zero.
I was reading a speech by RBI governor about the Issues in Banking.
I thought I will share some important parts of the speech with you all. No. Don’t worry. Its not that boring as its sounds… 

You can read the full speech here. Its worth the time you spend on it.
The recent decline in bank share prices has investors on the edge. Of course, part of the reason is that markets are in turmoil. Some of the greater decline of bank share prices can therefore be explained by the fact that they are seen as a leveraged play on the economy.
On bad days, they move down more, on good days they move up more. With markets generally in decline, the decline in bank share prices has been more accentuated.
However, part of the reason is that some bank results, mainly public sector banks, have not been, to put it mildly, pretty.
Over time, a number of large projects in the economy have run into difficulty. Reasons include poor project evaluation, extensive project delays, poor monitoring and cost overruns, and the effects of global overcapacity on prices and imports. Loans to these projects have become stressed.
There are two polar approaches to [dealing with] loan stress:
One is to apply band-aids to keep the loan current, and hope that time and growth will set the project back on track. Sometimes this works. But most of the time… the stress persists. Facing large and potentially unpayable debt, the promoter loses interest, does little to fix existing problems, and the project goes into further losses.
An alternative approach is to try to put the stressed project back on track rather than simply applying band-aids. This may require deep surgery. Existing loans may have to be written down somewhat because of the changed circumstances since they were sanctioned.
But to do deep surgery such as restructuring or writing down loans, the bank has to recognize it has a problem – classify the asset as a Non Performing Asset (NPA). Think therefore of the NPA classification as an anesthetic that allows the bank to perform extensive necessary surgery to set the project back on its feet.
If the bank wants to pretend that everything is all right with the loan, it can only apply band-aids – for any more drastic action would require NPA classification.
Loan classification is merely good accounting – it reflects what the true value of the loan might be. It is accompanied by provisioning, which ensures the bank sets aside a buffer to absorb likely losses. If the losses do not materialize, the bank can write back provisioning to profits. If the losses do materialize, the bank does not have to suddenly declare a big loss, it can set the losses against the provisions it has made.
Thus the bank balance sheet then represents a true and fair picture of the bank’s health, as a bank balance sheet is meant to.
So in April 2015, banks [were asked to take] proactive steps to clean up their balance sheets. For the loans that are of concern, the banks are attempting to regularize the loans that can be put back on track, and are classifying those that cannot for deeper surgery – and taking provisions in accordance with the degree of extant stress in the loan. They will also make provisions for loans that have weaknesses.
…intent is to have clean and fully provisioned bank balance sheets by March 2017.
…December 2015 quarter results can be compared across banks to get a rough sense of the task each bank has to accomplish.
Some banks have expressed an intent to move faster, so as to put the problem behind them.
The [Government] has indicated that it will support the public sector banks with capital infusions as needed. Various scenarios also show private sector banks will not want for regulatory capital as a result of this exercise.
There are some wild claims being made by some financial analysts about the size of the stressed asset problem.
Our projections are that any breach of minimum core capital requirements by a small minority of public sector banks, in the absence of any recapitalization, will be small. They will need government equity or preference share infusion since they are typically banks that will find it difficult to raise equity in the markets.
In sum, while the profitability of some banks may be impaired in the short run, the system, once cleaned, will be able to support economic growth in a sustainable and profitable way.
The market turmoil will pass. The clean-up will get done, and Indian banks will be restored to health. While we should not underplay the dimensions of the task, we should be confident that it is manageable and that the Government and the RBI will do what it takes to make sure that banks are able to support the tremendous growth that lies ahead.
As you must have felt, the speech by RBI governor does a decent job of giving a background of why banking shares are falling so much.
But inspite of the realistic picture painted in the speech (and I respect the person giving the speech a lot), at the end of the day, its RBI governor’s duty to ensure that people and investors have confidence in country’s banking system.
So if after reading this speech, you feel that you should go and buy more PSU bank shares now (to average down your prices), I will say that you should not be in a hurry to do so.
There is still pain left in the system as many of bank MDs and Chairpersons have been honest enough to claim during quarterly result declarations. Many people say that all PSU Banks will go the Air India and BSNL way. I think it’s a little too early to paint all of them with the same brush – aviation and telecom sectors were never as as critical as banking. Its seems intelligent to be bearish when shares are falling. But sometimes, being bearish for the sake of sounding intelligent and to be a part of growing crowd is not sensible.
Now, I am not predicting anything here.
Will the shares of PSU banks rise after next quarter results?
The answer is I don’t know.
Or whether stocks will fall more from here?
Answer again is that I don’t know.
But going by what sentiments are surrounding these banks and what bank officials are saying during result declarations, a further fall won’t come as a surprise.
If you think that you know something about the sector and can see light at the end of tunnel, then you should play this scenario accordingly. If you don’t understand it, then remember that its best to say that you don’t know and do nothing. Known-Unknowns are less dangerous than Unknown-Unknowns. Isn’t it?
A friend of mine was really excited about the fall in shares of banks. He literally seemed to have arm-twisted himself to take exposure to banking shares. I told him that he could do it but that would mean that he was willing to take the risk of further downside. He asked me that he was not sure which banks were worth investing, but felt that at a broader level, it might be a good idea to invest in the sector.
I asked him whether he knew of banking ETFs. There are some that are designed specifically for PSU banks and others that have a good mix of both PSU and Private banks.
So I mailed him an excel to play around with how he could take exposure to banking sector through ETFs.
Here is the screenshot of the excel:

Invest Banking Stocks India

The two portfolios are taken from two funds:
  • Goldman Sachs PSU Bank ETF (only made up of PSU banks)
  • Goldman Sachs Banking Index ETF(has both PSU & Private banks)

By choosing the % of investible amount to be invested in PSU Bank ETF, you can see how your money is exposed to various banks.
If you, like my friend, are interested in banking sector now, I suggest you to first understand the risk that it entails.
Second is that if you still feel comfortable taking that risk considering your long-term horizon, you can consider going for these ETFs instead of direct stocks, as they help diversify the risk of overconcentration in specific shares.
I suggest you make a similar excel and play(!) with it.
I can send it to you too to save you the effort. Just tell me how to reach you in comments or drop me a mail at
I will send it to you.
Now don’t think that I am recommending you to go an invest in shares of PSU banks. As you can see, Mr. Rajan is quite hopeful of banks turning around (sooner or later). But as Buffett once said: “Turnarounds seldom turn”. So we cannot be sure of that.
The post is more about me doing some loud thinking and to help you do the same about the current banking crisis.

Disclosure – Invested in some private and public sector banks.