I can think. I can wait. I can fast (April 29, 2017)

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“I can think. I can wait. I can fast”

–         Siddhartha, Herman Hesse


Declared Q4 results of banks till date show that most of them have reported higher NPAs.   However, as those NPAs have mostly been accompanied by faster loan growth, analysts have deemed them “acceptable”.   Bank stock prices have continued to surge as participants ignore the increased risk being taken on by Banks to deliver results.


A bank is a highly leveraged entity. What is fundamental to long term success is the discipline of underwriting acceptable credit risk over pursuit of growth.  Ask yourself

  • Why there are only 2 banks in India (with an aggregate Credit market share of less than 10%) who have had NPAs under control over multiple cycles.   Prudence in what is acceptable credit risk is not very common
  • Why do Banks “suddenly” report high NPAs. Accounting for NPAs is opaque; multiple avenues exist to ever green loans


The current exuberance unwarranted

  • The discipline of prudent lending – once broken – is not easy to change.
  • Loans turn bad with a lag.  However, most senior management teams at Private Banks are incentivized heavily through stock options which are not long duration.   Hence one is heavily incentivized to grow the loan book aggressively.
  • While Private Banks have a good growth run way as Public Sector Banks and some MNC Banks are in retreat, the results clearly show that growth is coming both from market share gains AND pursuit of higher risk business without an increase in margins.   And the Indian banking system has historically under-priced risk.  Read my friend Harsh Vardhan’s research here at
  • Valuations are being supported by a gush of liquidity and are well above fair zone.  Valuation multiples tend to mean revert and if pursuit of growth comes with higher NPAs in future, multiples will compress significantly.


Actionable implications

  • The party could go on for longer and become more rowdy before the clock strikes 12.
  • One should wait for favourable entry points.   Poor returns in Liquid funds/FDs are a lot better than a loss of Capital

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