Your 2x in 4 years Opportunity

No points for guessing the this one.

Its BFSI or Banking, Financial Services and Insurance. It comprises

• 18 public sector banks
• 22 private sector banks
• 46 foreign banks
• 53 regional rural banks
• ~1 lac cooperative banks (urban and rural)

For this edition, we will just stick to how the Banking ecosystem deserves to be at the heart of your wealth creation journey in 3 digestible sections

1. If youre bullish on India, you have to be bullish on Indian Banks
2. Recent performance of Indian Banks
3. 2x Investment Opportunities

Banking and the Economy: Intertwined Fates?

Everything in which involves money, impacts the banking sector. Everything which impacts the banking sector, impacts the economy. This may seem like a wide generalisation, but its more nuanced.

Think about it.

For instance, the government has put major forces behind infrastructure. Budget 2023-24 has allocated INR 75000 Crores for 100 projects deemed critical for enhancing logistics infrastructure alone.

This creates macro tailwind for banks -

• Increase the demand for credit from the public and private sectors, as they need to finance their infrastructure projects
• As long as credit risks are well managed, this creates an array of business opportunities for banks to earn higher interest income.
• If the infrastructure spending is focused on improving the quality and efficiency of physical, digital and social infrastructure, it can enhance the productivity and competitiveness of various sectors and industries in the economy, which can create more opportunities and demand for banking services.

All of this is not taking into consideration NBFCs and fintechs, which promise to further transform lending solutions

Take Oxyzo Financial Services, backed by Ofbusiness, for instance. They're rewriting the lending playbook by funding small businesses based on cash flows with innovative products like invoice financing, dropline overdraft, and work order finance.

We spoke to Asish Mohapatra, CEO Ofbusiness about some of the biggest money making opportunities in India.

??Tune in at your convenience.

Indias Biggest Money Making Opportunities

How good is the Indian Banking System today?

In a nutshell - its solid!

Private banks are better than public banks, given higher focus efficiency and customer experience. But that is by no means a snub on public banks which have outperformed over the last fiscal.

But lets take a view of the forest before the trees -

• Asset Quality : NPAs down from 9% in March 2021 to March 3.9% in 2023 as per RBI. Lowest in the last 10 years
• Profitability : Return on Assets (ROA) more than doubled from 0.3% in 2021 to 0.7% in 2022 (there was a low base in 2021 results due to covid)
• Credit Growth : Also strongly up, ~10%+ in 2023, from 8% in 2021 and expected to grow
• Capital Adequacy : Which indicates that the banks have sufficient capital to absorb losses and meet regulatory requirements. Also up from 14% from 2 years ago to 16%
• Liquidity: Usually defined through Liquidity Coverage ratio, which indicates a banks ability to meet its short term liabilities. RBI mandates this to be at 100%. Indians banks on average are comfortably over this with ~150%

The investment opportunity?

To me a good investment opportunity needs to have three things aligned -

1. A high quality asset growing profits, without excessive risks
2. Available at a reasonable value (relative to its earnings)
3. With long term, macro tailwinds in its favour

My portfolio has 3 private banks, all qualifying very similar fundamental and technical criteria. They are

• HDFC Bank: QoQ profits up 33%; close to a decade low PE of 16, well below its 200 DMA, Capital adequacy up; absorbing impact of HDFC + HDFC Bank merger uncertainty On similar lines,
• Axis Bank : QoQ profit up 38%, improved capital adequacy, low PE of 12, company ; absorbing uncertainty around impact of Citi bank acquisition.
• Kotak Bank: Similar story.

Now by no means is this investment advice and I would recommend speaking to your financial advisor before investing. And neither are these exhaustive criterias for evaluating a company (using PE ratios alone is very dangerous, and evaluating other fundamentals such as Free Cash flows is key), but you get the picture.

The broader point being that, given time corrections (technicals) + healthy earnings growth (fundamentals) + structural push (macro tailwinds), expecting an 18% IRR over 4 years is very reasonable.

In short, if youre looking for a simple 'double my money' opportunity, without excessive risk in the next half a decade (post tax), Indian banks maybe a good way to go

Disclaimer: All opinions stated here are for educational purposes only. Please speak to your financial advisor before making any investments