The term BFSI stands for Banking, Financial Services, and Insurance. It is an industry term for companies those who provide a range of such financial products or services. It includes Universal banks provides a wide range of financial service or companies that operate in one or more of these financial sectors.
It is a good time to invest in BFSI and their chart suggests it as once in a decade investment opportunity. The GDP of a country is one of the important factors of money supply (M1/M2) and the velocity at which that money moves. If our country the current GDP of INR 200tn is to reach INR 240-260tn, and the velocity will have to pick up, by implying strong credit (currently INR 100-150tn) growth. Following this, the consolidation theme will play out with the survival of the fittest, and big players getting bigger opportunities.
Likely the IL&FS & DHFL crisis proved to be a blessing-in-disguise for the banking industry and pushed them to correct their ALM mismatch, reduce the wholesale funding, increase liquidity and create capital buffers, by preparing them in advance for the worst. If someone has to invest in BFSI names they should follow some traits. It includes, Survival from the similar crisis in the past (GFC, IL&FS default) unscathed, should maintain a Strong Balance sheet with high capital adequacy, positive ALM and good asset quality, various discreet lending practices like low LTV and high insourcing, the capability to price the underwriting risk well, and the last one includes the Superior processes, which enable lenders to gain market share in a crisis.
There is a key mantra in equity investment that is, to invest when your margin of safety is the highest. It is the time when the biggest money is made. Now all the valuations data have become attractive for the broad Bank Nifty universe (PB ratio of 2x compared to 3.4x in December 2019) representing a healthy margin of safety. One of the wise investors commented that, be greedy when others are fearful. They have witnessed a 20x -30x jump in the customer verification queries in the last few weeks also.
