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Before sharing the data of another 18 banks and come to conclusion to where to invest, here is an insight for you to think on.

To all Speculators:

I have written in the media and talked to many investors (who think they are investors!) and also on this blog about speculation. This is another honest attempt from me to encourage you to turn your back on speculating forever and to become an investor.

Unwittingly, you are probably a speculator rather than an investor. Sustained sharemarket success begins with thinking like business owner, rather than trader of stocks. Betting on next ‘up’ and ‘down’ is no different to betting on black or red at casino. It’s not investing. Further, when someone says,” I just ‘invested’ in a tech start up,” it’s incorrect. Speculating is not investing.

When your friends, colleagues tell you about a hot stock they own and you buy it, or a newspaper story or business news channel makes a compelling case for selling a stock and you sell it, you are not acting like an investor. Also when you have a hunch that economy will start growing faster by next quarter then it is doing today, so you punt on quick gains in banking and infrastructure stocks, you aren’t investing either.

All of the above approaches are common way to construct a portfolio, but the one that results is a hotchpotch of ideas and beliefs that will usually amount to little. Worse, when something inevitably does go wrong, you have learned nothing from the experience because none of it was systematic, replicable or repeatable. Your focus was on the stocks rather than business but also on price rather than value.

To be honest, the sharemarket is far more geared towards speculation than investing. One in every four companies listed on the National Stock exchange could not cover their costs, many will have to rely on capital raising to stay alive. Owning such loss making or low profitable businesses require a leap of faith that the company will be eventually profitable or will make heaps of profits and while faith may prove beneficial spiritually, there is little place for it in investing.

There’s nothing wrong with experienced day-traders punting on loss making companies, provided they understand the risks of speculation, and have enough skills to overcome the enormous odds stacked against them, specially these three:

  • The impossibility of properly valuing loss making companies
  • The potential for higher price volatility in such stocks
  • The huge danger of liquidity

You don’t need to trade the one fourth of loss making companies on National stock exchange to boost your portfolio’s value over time. There are more than enough opportunities in the universe of profitable businesses to make double digit returns from the sharemarket without excessive risk. Value operations has achieved this as a manager of other people’s money.

So now let’s look at the other banks.

Below is the list of banking businesses and their gross revenues in returns on their total assets.

Name

NIM

Other Income

Total Gross returns on Asset

Syndicate Bank

2.52%

0.54%

3.06%

Vijaya Bank

1.69%

0.55%

2.24%

Bank of Baroda

2.14%

0.81%

2.95%

Bank of India

2%

0.83%

2.83%

Central Bank of India

2.14%

0.62%

2.76%

City union bank

2.72%

1.19%

3.91%

Corporation bank

1.77%

0.84%

2.61%

Dena Bank

2.10%

0.58%

2.68%

Dhanlakshmi Bank

2%

0.83%

2.83%

ING Vysya Bank

2.81%

1.33%

4.14%

Indian Bank

2.78%

0.79%

3.57%

Karnataka Bank

2.18%

0.96%

3.14%

Karur Vysya bank

2.48%

0.97%

3.45%

Lakshmi Vilas Bank

2.22%

1.12%

3.34%

Punjab National Bank

3.08%

0.87%

3.95%

UCO Bank

2.31%

0.48%

2.79%

Union Bank

2.43%

0.92%

3.35%

Yes Bank

2.24%

1.27%

3.51%

If we pull out their operating costs then their returns looks like this:

Name

Returns on Asset

Cost to Income

Net Returns on Asset after operating cost

Syndicate Bank

3.06%

1.47%

1.59%

Vijaya Bank

2.24%

1.23%

1.01%

Bank of Baroda

2.95%

1.12%

1.83%

Bank of India

2.83%

1.19%

1.64%

Central Bank of India

2.76%

1.57%

1.19%

City union bank

3.91%

1.64%

2.27%

Corporation bank

2.61%

1.04%

1.57%

Dena Bank

2.68%

1.15%

1.53%

Dhanlakshmi Bank

2.83%

2.46%

0.37%

ING Vysya Bank

4.14%

2.32%

1.82%

Indian Bank

3.57%

1.68%

1.89%

Karnataka Bank

3.14%

1.60%

1.54%

Karur Vysya bank

3.45%

1.62%

1.83%

Lakshmi Vilas Bank

3.34%

2.27%

1.07%

Punjab National Bank

3.95%

1.70%

2.25%

UCO Bank

2.79%

1.09%

1.70%

Union Bank

3.35%

1.57%

1.78%

Yes Bank

3.51%

1.51

2%

If we do an acid test and expect these businesses will face defaults then the returns will look like this:

Name

Returns on Asset after operating cost

Expected % defaults on total assets

Net Returns after  Default provisions

Syndicate Bank

1.59%

0.68%

0.91%

Vijaya Bank

1.01%

0.50%

0.51%

Bank of Baroda

1.83%

0.95%

0.88%

Bank of India

1.64%

1.02%

0.62%

Central Bank of India

1.19%

0.83%

0.36%

City union bank

2.27%

0.86%

1.41%

Corporation bank

1.57%

0.86%

0.71%

Dena Bank

1.53%

0.81%

0.72%

Dhanlakshmi Bank

0.37%

0.34%

0.03%

ING Vysya Bank

1.82%

0.69%

1.13%

Indian Bank

1.89%

0.91%

0.98%

Karnataka Bank

1.54%

0.67%

0.87%

Karur Vysya bank

1.83%

0.63%

1.20%

Lakshmi Vilas Bank

1.07%

0.53%

0.54%

Punjab National Bank

2.25%

1.29%

0.96%

UCO Bank

1.70%

1.36%

0.34%

Union Bank

1.78%

1.06%

0.72%

Yes Bank

2%

0.71%

1.29%

Lastly, as we did last time, we will only choose the businesses that are giving at least one percent return, we get City Union Bank, ING Vysya Bank, Karur Vysya Bank and Yes Bank.

But we want to invest in the businesses where they are growing profits and these are our and consensus forecasts for their earnings for coming year and its intrinsic value.

Name

VO Earnings forecast 2014

Consensus Earnings Forecast 2014

VO Expected IV 2014

Consensus Expected IV 2014

City Union Bank

17%

-4%

Rs 73

Rs 53

ING Vysya Bank

17%

16%

Rs 359

Rs 352

Karur Vysya Bank

5%

19%

Rs 410

Rs 493

Yes Bank

19%

18%

Rs 530

Rs 523

Your job doesn’t end here and speculate on those earnings estimate. You have to dig into them and find out their close estimates.

So we did found ten businesses worth to invest in last two weeks. On top of all our filters I normally run the Value Operations Quality and performance ratings and do further research on only investment grade businesses.

Name

VO Quality & Performance Rating

Axis Bank

B1

HDFC Bank

A1

ICICI Bank

B3

Indusind bank

B1

J&K Bank

A1

Kotak Mahindra bank

A3

City Union Bank

B1

ING Vysya Bank

C3

Karur Vysya Bank

A2

Yes Bank

B2

There are six banks that Value operations rank them as investment grade (A1, A2 and B1). Of them only four banks are trading at discounts. You pick any of them as your flavour.

Next week we will be talking about Auto ancillaries and see if we do have any opportunities over there. Let us know whether you like our recent posts and are they helping you in your research.