Novice investors like you and me are brought up on the belief system that banking and NBFC stocks should form a core part of our portfolio. The rationale is that the business of money-lending is an easy one to understand, there is no dearth of demand and the scope of opportunity for expansion is infinite. We are also told that the entire financial sector is a proxy for the entire economy and that the first green shoots become visible in this sector.
Yet, six of the brightest minds in the Indian stock market have studiously avoided the banking sector.
Dolly Khanna, Vijay Kedia and Ashish Kacholia have made their dislike for the sector clear by not investing even a farthing of their enormous wealth in a single Bank or NBFC stock.
Prof Sanjay Bakshi, the authority on value investing, knows that such an issue of seminal importance cannot be left unexplained to his vast legion of fans. The Prof has written an elaborate treatise (“When You Buy A Bank …”) in which he has laid bare his reasons for avoiding all companies with debt, including banks.
Porinju Veliyath is equally articulate about the issue. He plainly calls the banking business a “bad business”.
We avoided bank stocks for nearly a decade. Take deposits, have to pay back with interest; give loan, may or may not come back – bad biz!
— Porinju Veliyath (@porinju) July 20, 2015
The interesting part is that Porinju’s dislike for banking stocks does not mean that he does not recommend them to his followers. He did once recommend an investment in South Indian Bank on the basis that it is a “very safe bet” and “looks good”.
He also tweeted about it:
If anyone is keen on banking exposure, South Indian Bank @ 26 looks safe and rewarding after the Q2 bad results!
— Porinju Veliyath (@porinju) October 27, 2014
Unfortunately, Porinju’s recommendation has not fared well. Instead of being “safe” and “rewarding” as foreseen by Porinju, South Indian Bank has sunk to the CMP of Rs. 19 leading to a loss of about 28%. This loss must have further strengthened Porinju’s resolve to stay away from banking stocks!
However, Ramesh Damani, popularly known as the ‘Nawab of Dalal Street’ owing to his mastery in stock picking and seer-like review of the markets, has taken all of us by surprise by staging a dramatic somersault and declaring an allergy to bank stocks.
In an interview to Menaka and Senthil of CNBCTV18 in July 2014, Ramesh Damani was very bullish about Banking and NBFC stocks. He said:
“Menaka: Nothing has attracted you back to the financial sector?
A: We have a good position in the NBFC. We have some position in the private sector banks. If you look at one of the major companies I own, ICICI Bank, that is almost on the verge of a lifetime breakout around Rs 1500. So that on technical basis at least looks attractive to me.
The NBFCs are having a great run – companies like Gruh Finance, companies like GIC Housing—they are all having a great run. Sundaram Finance, very quiet performer, never diluted its equity despite being a finance company. So there are good pickings in that sector. There is this thought process that ultimately as Indian economy grows and the savings come in, there won’t be enough people to tap into the saving. So these are good quality businesses that are to be prized and to be held for many years to come from this point on all sorts.”
It is notable that Ramesh Damani clearly stated that he has a “good position” in NBFC stocks and that he has “some position” in private sector banks, including ICICI Bank.
However, in his latest interview of 11th January 2016 to ETNow, Ramesh Damani sang a different tune. When Ayesha Faridi asked him (@18.25) “What would you not touch?” Ramesh Damani said:
“Rather than names, specific sectors like banks and all which I actually don’t touch”.
When Nikunj asked him in an incredulous tone “You do not buy banks, even private banks?” Ramesh Damani replied “I have never bought a bank”. He then corrected himself to say that he had never bought a “significant” quantity of the private sector banks. “I missed out on all the great private sector banks” Ramesh said in a rueful tone. He also added that he is “always looking for value” and that he is “not averse to any sector, including Banks”, contradicting his own statement. Ramesh also implied that he dislikes banks because they “don’t offer value” at present.
Now, the unfortunate aspect is that this contradictory and inconsistent stand by Ramesh Damesh has left novice investors like us confused and perplexed as to what our own stand should be with regard to Banking and NBFC stocks. Should we follow the path shown by our illustrious idols and shun banking stocks or should we defy them? If you have a viewpoint on this seminal issue, now is the time to state it!