By Chintan Haria
Banking as a theme has been in vogue of late. We are witnessing the creation of the world’s fourth most valuable bank, just behind large banks such as J.P. Morgan, ICBC of China and Bank of America. It would not be an overstatement to say that the banking sector is the backbone of the Indian economy. Over the past five years, the sector has seen a dramatic turnaround by cleaning their books and regained investors’ trust. It also stood up to the test when despite the banking crisis in US and other developed countries in February 2023, Indian banking system remained resilient and stable. The top-5 banks have witnessed strong credit growth even as the asset quality has been continuously improving.
Financials of PSBs are healthy today with the net profits almost tripled to Rs 1.04 lakh crore in FY23 as compared to Rs 36,270 crore earned in FY14. Simultaneously the Return on Assets (ROA) in PSBs rose from 0.51% in FY14 to 0.78%, while Net Interest Margin (NIM) has also increased from 2.73% to 3.23% in FY23.
Banking still remains an under-penetrated segment in India as compared to global standards. According to RBI statistics, there is one commercial bank branch for every 9,000 citizens. As India moves ahead to become a $5 trillion economy over the next couple of years, the banking sector is poised to play a key role in this journey. Historical trends show that banks tend to grow at 1.5-2x the rate at which the economy grows.
Participating in the Growth Story
In order to tap into the banking growth story, there are multiple ways in which an investor can take exposure to banks. The first option is direct investing. Here, one would need to shortlist and identify stocks to invest in. Direct investing could be a tough challenge since there are a plethora of players to choose from. Analysing balance sheets of each bank is a time-consuming and a research-intensive process for an investor who may not have the domain knowledge.
The second option is investing in an actively managed banking based sectoral and thematic fund. The third option is passive offering, where a variety of combinations is available to choose from. Within the ETF universe, investors can choose from Bank Nifty ETF, Nifty Private Bank ETF and Nifty PSU Bank ETF.
To conclude, the banking sector is at the cusp of exciting times and may see a quantum leap in the years ahead. Depending on one’s portfolio requirement an investor can choose between an index fund or an ETF to gain exposure to the banking names. Those looking to make a staggered investment can consider investing through SIP in a Nifty Bank index fund.
(Chintan Haria, Head Investment Strategy, ICICI Prudential AMC. Views expressed are the author’s own. Please consult your financial advisor before investing.)