The financial sector in the United States has been struggling post the financial crisis, which began in October 2007. In 2011 (four year into the crisis), there has been 71 bank failures. Given the problems facing the banking sector, economy and consumers, the weakness in the banking industry is expected to continue in the foreseeable future.
This does not mean that there will be no short to medium-term investment opportunities in the U.S. banking sector. Whenever sentiments get over bearish, the probability of upside exists. However, I would be very cautious in choosing any U.S. banking stock for my long-term portfolio.
In sharp contrast to the U.S. banking and financial industry, the sector is still at a very nascent stage of growth in many Asian economies. India happens to be one such economy where the banking sector has significant long-term upside potential. From this perspective, exposure to a few good Indian banks can reap meaningful benefits in the long-term.
This article discusses two Indian banking stocks listed in the NYSE. In my opinion, these stocks are a great regional diversification option for the portfolio. I would not attach talk about any price targets; however, these stocks are a great investment for the next 5-10 years.
Before I talk about the banks, provided below is some data regarding the penetration of various banking related services in India. This will give readers an idea of the impending growth in the banking sector for India (as financial product awareness grows with rapid urbanization and education).
Further, India’s consumer debt to GDP ratio is also much lower compared to other Asian peers. With consumer debt to GDP ratio of 8.5%, there is enormous potential for the growth of the banking sectors core business.
With these fundamentals factors backing my overall rationale, I would discuss in brief the two banks, which investors can consider exposure for the long-term.
ICICI Bank (NYSE: IBN) – IBN is one of the largest private sector banks in India providing a wide array of banking and financial services. The services include commercial banking, retail banking, project and corporate finance, working capital finance, insurance, venture capital and private equity, investment banking, broking and treasury products and services. Besides this, it also provides NRI banking, international banking, rural and agri banking, Internet banking, mobile banking, and phone banking services, as well as dematerialization services.
IBN had a net profit of INR51.51bn for fiscal 2011, a 28% increase over the previous fiscal. The ROA improved substantially to 1.34% in fiscal 2011 compared to 1.13% in fiscal 2010.
Further, as of fiscal 2011, the cost-to-asset ratio was contained at 1.7% despite the expansion in the branch network and increase in business volumes. The Bank’s capital adequacy position continued to be very strong, with total capital adequacy of 19.5% and Tier-1 capital adequacy of 13.2%.
The percentage of nonperforming assets (NPA), to net consumer assets’ for IBN was 0.94% as of fiscal 2011. As the second-largest bank in India, IBN is well placed to capitalize on the strong impending growth in the economy.
HDFC Bank Limited (NYSE: HDB) – HDB is another major bank in India providing a diverse range of banking and financial services similar to ICICI Bank. Broadly, its services include treasury, retail banking, wholesale banking and other banking business. Additionally, the company offers NRI banking services; medical equipment, healthcare project, and short term finance; bill discounting; export credit; credit substitute products; structured cash flow financing; real estate funding; and online banking services.
HDB had a net profit of INR39.26bn for fiscal 2011, a 33% increase over the previous fiscal. The ROA improved to 1.58% in fiscal 2011 compared to 1.53% in fiscal 2010.
As of fiscal 2011, HDB’s total Capital Adequacy Ratio (CAR) calculated in line with the Basel II framework stood at 16.2%, well above the regulatory minimum of 9.0%. Of this, Tier I CAR was 12.2%.
As of fiscal 2011, HDB’s ratio of gross non-performing assets (NPAs) to gross advances was 1.05%.
With 1,986 branches, 5,471 ATM’s and presence in 779 cities, HDB is well positioned to gain from the impending growth in the banking sector in India.
In terms of regional and sectoral diversification to one’s long-term portfolio, the Indian banking sector provides a golden opportunity to benefit from the huge impending growth for the country and the sector. Further, like many Asian banks, the Indian banks are fundamentally sounder with very less exposure to risky investments. Therefore, having one or two Indian banks in the long-term portfolio can help in boosting overall returns.