Why Choppy Waters Await Indian Banks

In Q4, banks sailed through a tough quarter. But loan growth worries remain

- Abhishek Mukherjee

Writing to his shareholders in 1990, investing legend Warren Buffett was at his candid best when describing his stance towards bank stocks. "The banking business is no favourite of ours," the chairman of Berkshire Hathaway said in his keenly-tracked annual letter. "When assets are twenty times equity—a common ratio in this industry—mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks."

His trusted partner, Charlie Munger, echoed the views, too, over the years.

"It's hard to run a bank intelligently," Munger told an interviewer once. "There's a lot of temptation to do dumb things which will make the earnings next quarter go up, but are bad for the long term."

For a duo as unimpressed by banking (and bankers) as Buffett and Munger, it came as a surprise to many when Berkshire made sizable investments in lenders like Wells Fargo and Bank of America later.

But such counter-intuitive moves were typical of the most successful investing partnership in history—they were never held hostage by outdated thinking, even their own.

In fact, Munger had conceded that banking, run intelligently, is a very good business, but was quick to add that the kind of executives who have a Buffett-like mindset and never get in trouble are a minority, not a majority group.

And Buffett, in his 1990 letter itself, outlined what would make him press the 'buy' button for bank stocks. "Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices."

For the millions of investors in India's banks, is this the perfect time to assess whether their stocks pass the 'Buffett filter'?