Why I'm Starting to Build up Indian Banks

Folks, hide the offspring and avert their eyes - these are charts no child should be exposed to. Oh the horror of it all

I normally do not buy charts like this; I like to buy strength most times, not weakness. But I am hoping a double bottom is being formed with mid March lows in both these names. Further, in the "No Indian Bank Left Behind" program, I am almost obliged to throw these guys a bone. I've not treated these 2 stocks as buy and holds, but more like trading vehicles and the layer in/out approach has actually worked wonders with these two since we have nice profits.

I am upping HDFC Bank (HDB) to 1.1% and ICICI Bank (IBN) to 1.2% ,so this is a mini basket of 2 names of which I am "up" to 2.3% weighting. Not that much of a portfolio due to my general caution of the market and the potential for some pain in Asian economies as commodity prices soar. Plus if these names break below their March lows, the potential for much lower prices lies ahead (which is why I don't usually buy these sort of charts)

Folks, what is happening is India is they have this small thing called inflation. So the central bank there is doing the traditional thing, which is to raise interest rates. Banks usually don't like an increasing rate environment. See, this is very unlike the United States when you have an inflation problem and  you hide it under government reports, and say you have no inflation. Then your central bank can have the latitude to cut interest rates from 5.25% to 2.00% (as opposed to holding firm like Europe or raising rates).

So you sacrifice the lower and middle class to the dragons of inflation while smiling and saying there is no inflation and even if there was, it would "dissipate" in the 2nd half of 2008. However, even with this gift, our banks which should be benefiting from these lower rates are so mired in the twin pillars of credit debacle and housing debacle that they are still stinking up the joint (remember we hate regulation here in America - and we basically allowed these guys to self police themselves - yee haw Cowboy).

These banks are flat lining even with all the King's horses and all the King's men delivering interest rate cuts to them (license to print money for banks). Ah well, such is the socialistic system we live in - rob from the poor, give to the rich. In India they still have old fashioned notions I suppose... and their banks are suffering for it. But we're still talking about 2 giants in the country (they are beginning to open US branches by the way as the "East" continues to eat up the "West"), in homelands that will be growing exponentially for the next 20-30 years.

Comments

[Chris P]

Nice article. Forgive my ignorance, but what is the "layer in/out" approach you refer to toward the top of the article?

[max]

India !
What a paradox they gave away $7 Billion to Farmers as farm loan waivers. They charge $7 Billion towards Petrol Taxes! Feed the poor and Poor the Rich !
Paradox- I see sensex to become Sese Less my new word would be SenseL (L for less-)

[ringy]

Max,

To put it in perspective - US federal govt gave $16.2b in 2004 to US farmers.
- Fuel tax in US is approx 47c (State+federal) per Gallon. Over 10% of all fuel consumed. Surely in several billions of dollars.

Yup Indians are dumbasses. The govt in the US surely have it all figured out. :)

[Brahm]

Mark has gotten enough in his analysis, or may I say within his spiel. In India there is a kind of small bubble in the property sector, and there has been some "cooling" of the sector. Sales in cities like Bombay are not that hot anymore, but not the disastrous situation we have here in our good old US of A. The Indian Fed (they call it the Reserve Bank} did some of its job months ago by tightening interest rates to cool inflation and a probable property bubble, but in my view not enough. Because this is also a political year with national elections due to be held within 8 months. So more squeezing avoided for multiple reasons. The present Left of center Government (which depends on the real Reds of India for outside support) has been a do-nothing Government afraid of having its survival oxygen withdrawn from it by its Red support. So subsidies effectively has increased for energy supplies, including through imports. and, as many know lots of budget busting (Leftist) pork as well. Government finances in bad shape. They have been improving substantially before that. Government companies in the oil/gas sector are also in deep deficit, etc etc etc!

My view is short term HDB is somewhat (not too) risky at these price levels. Long term prospects are very very bright. A change in Government next year may bring about more conservative policy in the first year of a new Government likely to be headed by the Nationalist BJP. (Notice I don't use the word Hindu; that is the propaganda spiel of the Left and Congress as though they are not Hindu also! Often tooted by our Western media, especially that of the liberaal class.) IBN is multipronged Bank lending enterprise; it has not gotten into the foolishness we all are familiar with here. It is more in tune with my style rather than HDB.

I usually don't pay much attention to the beautiful charts that Mark and others rely on, even though they are interesting. I am long term in inclination., rely more on fundamentals and opportunity. So, I may wade into IBN, and perhaps into HDB also after waiting some more. I like IBN, and I think US$30-35 is a good entry point, or there-abouts. It is growing fast through recapitalization ( new shares) sometimes, and lots of domestic and some foreign expansions. But more conservative in mode than most of our banks, especially the big ones.

[prax]

Well dont think the indian govt dont fudge interest rates
they publish wpi figures and that too the gap between early and net wpi figures is growing. In india return on deposits are already negative
to wpi inflation and not cpi inflation which is well into double digits..

[User 185589]

in case of indian financials the headwinds are very clearly articulated and every soul remotely associated with the indian financials markets will probably be able to elaborate issues around higher inflation, further potential of tightening by the central bank and election year risks - all have sound rationale around the same -

however, i do believe that most of the above (if not a bit more of the same) has been priced into the valuations of banks -

lets look at IBN / icici which i have been following for a few years now (invested , traded as well) - its potentially trading at ~1-1.2 BV on the core banking franchise (with potential RoEs of 15% + in 2 yrs) - it raised almost 50% of the current book in the last year which means that its got the resources to deploy the same. Accepted that retail lending will be mnuted for the next yr, but the corporate / infrastructure / capacity creation related lending is showing limited signs of slowdown - bank expects to grow overall lending ~20% even in face of these slowdowns .

in addition, it truly is a leading pvt sector bank with still enough potential to take business away from the less efficient govt owned banks -

the other reason to look at this asset is the truly phenomenal franshises of the subsidiaries - primarily in the fast growing (>40%) insurance space in india - value of all subsidiaries put together would account for >50% of the value of stock (taking conservative assumptions on the operational metrics)

my simple point is that this is a time when potentially all that could go wrong with the macro and micro for the bank has been factored in leaving very little room for valuation downside . technically , this is the poster child for anyone who wants to short indian financials as this is probably the only stock where one can get good size borrow for shorting -

net -net i would be a strong buyer at 750/share (for the underlying) - ~37.5 for ADR (IBN) and buy on dips with a return expectation of >50% over the next 12-15 months -

[hownow]

er.. how's the trade panning out Mark?

Here's a perspective for further positions:

indiaplay.blogspot.com...