It’s halfway through the reporting season and Bertie is struggling to recall a quarter that has felt this meh. Well, statistically there would have been poorer earnings growth in the past, but that would have been accompanied by significant macro upheavals. But for what is a macro-placid time in India, this outcome just feels disappointing. Bertie has scrolled through dozens of result notes but is yet to find anything that has made his eyes light up.
To be sure, there are a few ‘doing-alright-under-the-circumstances’ candidates, and a bland institutional portfolio can be constructed around them. But that is rather like the backhanded compliment that Bertie sometimes receives “You look OK for a man in his forties.” Bertie wants to look like a million bucks without any qualifying asterisk and small print—and also find similar stocks—but both seem to be getting progressively harder.
Take banks, for instance, where most of the large ones have reported numbers. All through his investing career, Bertie has had a large chunk of his portfolio in one or more private sector banks that were growing at least five percentage points faster than the system, like clockwork. And they were doing that with best-in-class profitability metrics. Bertie’s investor deck would always have slides on these multi-decade winners wherein he would draw a neat triangle to show nominal GDP growth, banking loan growth and that of his favoured banks—the point being that in a growing economy like India, credit was growing faster than the GDP and well-run private banks were gaining market share, consistently and profitably.
But looking at this result season, it seems Bertie might have to delete that slide. Banking sector credit is barely growing in double digits and the erstwhile favourite banks are barely keeping up. With margins wilting and a few asset quality wobbles, this anaemic loan growth is not leading to any profit growth. Bertie used to have another triangle in his investor decks—this time showing the loan growth, net interest income growth and profit growth of his blue-eyed banks. That triangle seems to have inverted.
Now our man has been in the markets long enough to know that the short term should not be extrapolated into perpetuity. So, in order to be reassured of the good health of banks, he decided to meet his long-time friend Sri, who was the street’s favourite banking analyst. After dissing the deteriorating quality of sambar at their usual Matunga eatery, they launched into the predicament at hand. “Some of it is, of course, cyclical, Bert,” Sri said, slurping his filter coffee. “The pressure on margins will eventually ebb and growth will come up a couple of percentage points”. Bertie kept looking at Sri, hoping for more but that was all the reassurance he was going to get. “Asset quality?” Bertie asked hopefully. “Can’t see it improve from here. If at all, the risks are to the downside.” He noticed that Sri had switched to his sell-side vocabulary.
On the short ride back to Bandra, Bertie was desperately thinking of ways to hold on to his beloved triangles, but could not think of any. He knew that in most emerging markets where growth was single-digit, the rule-of-thumb for banks was to buy below book and prepare to sell at one and a half times. Bertie used to laugh at how much time those analysts would spend calculating every basis point of net interest margin change after a central bank rate action. In a low-growth environment, this matters a lot. That’s when he recalled how NIM-obsessed Indian bank analysts had been of late. Was this his karmic comeuppance for scoffing at NIM-counters? Bertie shuddered at the thought but banished it quickly and instead started thinking happy thoughts like the rosy credit-to-GDP charts and low- but- rising- quickly trajectory of India’s per capita income. But for some reason, even those foolproof images were not enough to lift his mood.
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.
