Monday, September 12, 2011

Value of Financial Stocks

Banks, NBFC, Development finance institutions are three major groups in the Financial stocks category. Analysts continue to hype up the 'immense' value and growth prospects of this sector.

So I start thinking. What do the financial stocks do? They make money from the spread between borrowing and lending rates. They are an important part of the economy. An inefficient fianncial sector can become a big drag on the economy, but does this mean that an efficient financials sector can be a stock market leader? What will ensure above average performance from a business that essentially trades in spreads?

Banks are utilities matching borrowers and savers, providing payment services, facilitating hedging etc. The value added comes from reducing the cost of doing so. Paul Volcker questioned the role of finance: “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence." - Satyajit Das. (Read interview here. )

Well, this is what I thought, although Mr Das explains it much better. He says  - "Confucius wrote that: “The superior man understands what is right; the inferior man understands what will sell.”

The financial services sector saw an enormous boom for the last 30-35 years. I feel their golden period has come to an end. What value addition do these people do? Of course, they pay themselves extraordinary salaries and bonus, but what do they do for the economy?

For this reason - my inability to understand their business model, I have not been a fan of NBFC and development finance companies. I understand what banks do, and, if they do it well they make fair return on capital. However, our friends keep on pushing the NBFC's and the DFI's. Good for them. As investors, we can choose our investments. Think about it.

1 comment:

TraderByBirth said...

Sir,

I am a big fan of yours and follow you everyday.I have purchsed everonn @430 on August 29th and it touched a high 450+ the next day and the news of MD bribery case came out on Monday.I am unable to get out of this scrip.What should I do now? Its very painful to take the losses due to such scams.Can I average it at this level? Please suggest.Right now it is @443.