Bank On The Desi Brigade

Foreign banks are more vulnerable to the credit crisis than Indian banks. Hence, the latter can be attractive long-term bets

DEVANGI JOSHI & KARAN SEHGAL ET INTELLIGENCE GROU P

IN THE past one-and-a-half years, the global banking sector has succumbed to the credit crisis, and the domestic banking industry has also felt its tremors. Following the global stock market crash, led by a plunge in banking stocks, Indian banking companies also lost significant value. However, a comparison of the Indian banking index with the indices of developed economies (based on market cap) shows that structural and regulatory differences caused the domestic banking industry to display resilience amidst the turbulence since July '07.
    The chart above compares ET's banking index with global bank indices since July '07. The ET Bankex comprises India's 15 largest banks. The euro zone bank index includes scrips of ING, Societe General, Deutsche, BNP Paribas, UBS and Credit Suisse. The US bank index includes Citibank, Bank of America, Goldman Sachs, Merrill Lynch, Morgan Stanley and JPMorgan, while the UK bank index comprises Barclays, HSBC, RBS and Lloyds TSB.
    While global indices have lost nearly 50-60% of their value since the troubles related to subprime mortgages and subsequent writedowns started emerging, the Indian banking sector has lost about a quarter of its value in the past 15 months. This is logical, as banks in the West were struggling to remain solvent, while the struggle in India was only limited to the slowdown in growth. The y-o-y profit growth of Indian banks has fallen from 31% in the March '08 quarter to 25% in the September '08 quarter. Thus, so far, the slowdown has not been too painful.
    The domestic banking sector is a tightly governed business, as banks have to invest almost a quarter of their deposits in government securities and the cash reserve ratio is at 5.5%. These conditions make it necessary for domestic banks to park around 30% of their deposits either in government bonds or in cash. Moreover, commercial banks make money by borrowing and lending, unlike foreign banks like Citibank, which make money through asset market activities which include investment banking and mortgage structuring. Hence, foreign banks are more vulnerable to the slowdown in capital markets than Indian banks.
    The Indian economy, which is expected to grow at over 7% per annum, provides better growth prospects for banks than Europe and the US — where the economy is on the verge of recession. The market has obviously over-reacted to the financial crisis and domestic banks can be attractive bets for long-term investors.
    devangi.joshi@timesgroup.com