Monday, May 2, 2011

Should one invest in banking stocks now?

Savings account deregulation is a fresh challenge that is emerging for all the banks and particularly those banks which has high CASA ratio as there will be compression in NIM once this regulation is implemented. Already banking stocks in India were at the top end of the Interest rate cycle 9 months back when the entire regime of loose monetary policy was about to end and RBI became hawkish on Inflation and started increasing rates. 

In an article dated 1st FEB 2011 "Banking stocks injured by tripple edged sword"  it was discussed how the pain on asset quality and lower NIMs will start getting reflected from the 4th quarter of FY11 onward which will take at least 6 to 9 months to bottom out. Only then the investors having 1 to 2 years of investment horizon should enter into quality large cap and mid cap banks. There is still enough pain to be witnessed by bank stocks going forward. So fresh allocation in bank stocks at this point of time should be avoided until both time and price correction happens and valuation on 1 year forward basis is compelling.

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