Bank Stocks? Better pick ones with retail focus

MUMBAI: Investors historically bifurcated Indian banking into two categories — state-run and private ones — but that’s changing. It will for the foreseeable future be on the lines of retail-focused banks and corporate lenders. Thanks to the sins of consortium lending during the boom years, bad loans problems are weighing down even privately-run banks, and investors are separating the wheat from the chaff.

It was not just the likes of state-run Punjab National Bank and Bank of Baroda which are languishing near annual lows due to bad loans, but even the private peers such as ICICI Bank and Axis Bank are being shunned by investors.

"With rising corporate loan stress, investors are increasingly looking for banks with retail focus," said Aalok Shah, banking & financial services analyst, Centrum Capital. "Large corporate exposures may elicit more regulatory provisions eating into profit margins. Retail assets may be low yielding but are safe with no risk on bank capital erosion."

Retail-focused lenders including HDFC Bank, Kotak Mahindra Bank and IndusInd Bank have returned 2-6 per cent in the past three months when the banking index, BSE Bankex fell 4.5 per cent. On the contrary, ICICI Bank is down about 7 per cent and Axis has fallen 16 per cent.



Given the Reserve Bank of India Governor Raghuram Rajan’s diktat that banks clean up their books by March 2017, the higher bad loan recognition will dent profits of banks, which have high corporate exposure. Banks earn higher margin from corporate borrowers than retail ones. But, retail assets are considered to be safer now as many institutions are struggling to repay loans due to economic woes.