Should We Bank On Banks?

Those stocks that hitherto have created maximum wealth for retail investors are the ones that have corrected the most. Amidst the uncertainty surrounding the most important sector for the financial system of India, such stocks suddenly have started looking attractive after a vertical fall. Yogesh Supekar and Karan Bhojwani discusses the pros and cons of taking exposure to banking stocks in such a fluid market situation

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The financial sector has always been the favourite of both institutional and retail investors. The reasons for the sector being extremely popular so far were simple: the financial sector mimicked the economic growth completely; the sector being a leveraged one offered superior growth opportunity and provided a high return on equity or return on capital for the investors; and the untapped opportunities lured new players to operate in the sector, thus increasing the size of the sector exponentially. In this scenario, the banking industry makes for a crucial part of this highly leveraged financial sector.

If we look at the reasons why the financial sector was hitherto so popular, one may find cause to worry in terms of the sectoral prospects because the very growth levers that made the sector attractive amongst the investors seem to have vanished in view of the virus pandemic-influenced lockdown in the country as well as the world. Forget growth, even survival is at stake for a majority of financial companies, including banks. Thus, how does one evaluate the investment prospect when the situation is as fluid as today? The economy is at a standstill and the banking operations nationwide are impacted.