Banking Stocks Still Not Ripe For A Buy: Shankar Sharma

When Shankar Sharma advised investors in March 2013 to sell bank stocks, very few paid attention. When he repeated his warning in June 2013, investors thought he was being unnecessarily dramatic with his expressions that “Banking is the worst business in the world” and “Banking will be a terrible sector to own in coming months” though there was strong logic to support it. However, if you look at the staggering losses that banking stocks posted in the short period since then, you have to kick yourself for not paying more attention to the doomsday prophecy. The cuts have been savage across the private and public banking space.

Personally I am very badly affected because I have a huge chunk of money in SBI, PSU Bank ETF, HDFC Bank, IndusInd Bank, ICICI Bank and Yes Bank.

In hindsight, there was logic in the thinking that if the economy is slowing down so perceptibly, how can banks be immune from that? I should have pared the financial stocks in my portfolio.

Shankar Sharma, in his latest interview, again goes for the Jugular. “How can any bank lend such huge sums to Vishal Retail which has no assets and has become a NPA” he asks and builds the argument that as the underlying asset-base is weak, Banks have a lot more downside left in them.

“There is no saying that at half book, a bank is good which used to be three times book because you do not know if that book itself is stable or whether it is going to evaporate and become a minus or a negative book number” Shankar Sharma emphasizes.

“Therefore, banking stocks, even at 50% lower than the current price, would still be a hard case to make for a buy” he adds.

Now, if you take a deep breath and analyze the situation calmly, you will find that what caused the severe rout in the stock prices is the sudden reversal in sentiment. From a regime of declining interest rates, it suddenly became a regime of increasing interest rates because the RBI was forced to adopt a hawkish stand to stem the steep fall in the value of the rupee.

Fortunately, in the July meet, the RBI did not hike interest rates further and that helped to calm sentiments a bit.

What one can understand from the situation is that a slight change in the mood or sentiment or a few dovish words from the RBI or the Finance Minister can send these stocks soaring up. That may well happen if the Rupee shows signs of stabilizing or if other reforms are announced. On the other hand, the downside appears to be reasonably protected because the expectations are low. One may not see a further savage sell-off.

If the banking stocks do surge upwards, you will kick yourself for not seizing the present opportunity to buy the stocks.

So, what I am proposing to do is to start nibbling at the top-quality financial stocks. A little bit of HDFC Bank, SBI, IndusInd Bank and even Yes Bank on a weekly basis should help me average out nicely. I also have HDFC, LIC Housing and Repco Finance in my portfolio. These are also worthy candidates for addition to a long-term portfolio if there is a further dip in their prices.

I am going to deploy my gunpowder in a slow and systematic manner.

What is your gameplan?