Growth biggest concern for banks now; keep an investment horizon of 3 yrs

Even before the outbreak of coronavirus, growth in the overall banking industry was not encouraging.

The correction in the markets, and especially in the banking setcor, has indeed been brutal. We have never seen this type of hammering in the large-cap names such as HDFC Bank before. The stocks are falling like there is no tomorrow and it is difficult to say whether the selling is overdone or not as shares may slip further. That said, the valuations of names such as HDFC Bank and ICICI Bank have become attractive, but the biggest concern is where will the growth for the banks come from.

Given that several parts of the country have been put under lockdown and sectors such as auto have announced production halt to stem the spread of coronavirus (Covid-19) pandemic, it is obvious that credit growth of banks will moderate going ahead.

Even before the outbreak of this disease, growth in the overall banking industry was not encouraging. Banking credit was growing 6-7 per cent only. Further, it must be noted that only private lenders were growing and not state-run banks. Now, with this crisis, private banks will have to take a back seat as they are, to a great extent, retail-oriented. With the lockdown and economic activities getting impacted, it is very natural that there will be apprehensions among retail investors as regards spending.

Also, since businesses are shut, demand for loans by small-and-medium enterprises (SMEs), autos, and even corporates will also be adversely impacted.

So, my question is where will the growth come from? HDFC Bank management sounded very optimistic in an interaction with a TV channel on Monday regards overall growth; but, I want to understand how will this be possible.

Lenders such as HDFC Bank or ICICI Bank have decent capital adequacy and there won't be any liquidity issue for them. They were enjoying premium valuation because of high growth but in this environment, it is difficult for them to grow at previous levels of 18-20 per cent.

From an investment point of view, investors should understand that banks will take a hit from all the sectors and not any particular segment. So, those who intend to buy shares of banks should have at least three years of investment horizon. If any sector of the economy is in trouble, it will have an impact on the banking sector.  

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Siddharth Purohit is a research analyst at SMC Institutional Equities. Views are his own.

(As told to Swati Verma)