Wednesday, May 18, 2011

A Fall Of 99% In SBI Is Good!

State Bank of India declared results recently where profits fell 99%. Now most analysts, brokerages and investment houses will look at the negative side of the results and criticize the bank. I personally do not hold any stake in the bank. When SBI's profits fall 99% - everyone looks at SBI, but I find it surprising how very few people try to read the signs behind the apparent.

But when I look at the results, I feel we as Happionaires can learn something else from these results. If we see the results up close we will realize that the profits have been reduced, because the bank has made provisions for bad-debts or Non-Performing Assets. Basically the business of a bank is very simple, all these complicated words invented by people in black suits makes common people a bit hesitant to understand how things work. A bank simply borrows money from people by giving them 8% and lends it out at higher rate of 14%. A Non-Performing Asset is a loan given out, but not returned and earning no interest for the bank.

So SBI, the bank has given out thousands of crores loans, out of which there seem to be a sizable amount of loans which are non-performing or debts gone bad or are unlikely to be recovered.

When we look closer, we should try and understand to which sectors these loans have gone to, because based on that we can expect a large scale turmoil to come in those sectors. Finance and money are the life blood of any business. When finance dries up, the business crumbles.

In fact not just a business, but even an individual, country or continent survive and thrive when they are well financed. I had shared this idea, in our first book - Invest The Happionaire Way, and I feel this will be a timeless idea for centuries and millennium to come.

Money is not the root cause of all evil, but a lack of money that is a root cause of all evil.

Now look at SBI - a sizable part of the NPAs are coming in from the Real Estate sector. This means that debts and loans given out to real estate companies as well as individuals who have taken loans to buy real estate can turn into a high risk group and default.

When these defaults happen, I think it will be an excellent opportunity to learn and act upon. On one end, we can learn that heavy debt always is like a sharp hanging sword for a business or individual - that can injure anyone when a sharp wind blows. We can learn that bubbles grow for much longer periods of times, than we can remain rational. On the other hand, when large scale defaults are happening - there will be a good chance for value picking in the physical world real estate - usually for such internal financial events and readings to reflect in the real world take at least 6 months.

All those who have been a part of our family, would have seen how Gold prices have been constantly rising as countries print notes. Similarly when debt and interest rates tighten, real estate prices correct.

Also let me congratulate all those who were able to guess the company The Chameleon has been investing in. It makes me very happy to see people trying and being inquisitive and using their minds to gain knowledge that will help them invest better.

Happy investing!

Yogesh Chabria


Anonymous said...

Interesting observation as always.

I would like to know from the SBI's result that how to find out that "a sizable part of the NPAs are coming in from the Real Estate sector. "

I am sure there will be, just want to know how we can categories NPA that from which sector they are contributing.

Anonymous said...

Actually if we see the results, a sizable chunk is to steel sector - the highest to it.. the real estate sector is not that big...

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