In the wake of recent market corrections, finding clarity can be a challenge for investors bombarded by conflicting narratives. However, veteran fund manager Prashant Jain believes there is one space offering a “no-brainer” opportunity that the broader market might be overlooking: large banks.
Despite the recent selling pressure and complex market dynamics, Jain maintains that the fundamentals of India’s large banking institutions remain robust, making them highly attractive long-term investments at current valuations.
Robust Credit Growth and Favorable Macro Factors
According to Jain, nothing is fundamentally wrong with the large banking sector. In fact, macroeconomic indicators point to a strong runway for growth. He highlighted that credit growth has been picking up pace, with the latest readings touching an impressive 17%.
Furthermore, external factors are driving demand for bank credit. “Bond yields have moved up slightly,” Jain noted, adding that “working capital cycles will become bigger because of supply chain issues and some rise in commodity prices.” As businesses require more capital to manage these extended supply chain cycles and higher costs, large banks are perfectly positioned to fulfill this demand.
De-rating and Valuations: A Rare Entry Point
The core of Jain’s investment thesis rests on the significant de-rating the sector has undergone, leading to undervalued stock prices relative to their growth prospects, Return on Equity (ROE), and Return on Assets (ROA).
Jain drew a stark contrast between today’s valuations and those of the past. Five years ago, investor sentiment was overwhelmingly positive, with people eagerly buying into these same banks at premium valuations of four to five times price-to-book (P/B) value.
Today, while growth rates and ROIs are slightly lower than they were during that peak, the valuations have become significantly more reasonable. Trading at just one and a half to two times price-to-book, Jain believes these businesses present an excellent, lower-risk opportunity for long-term investors.
The Impact of Foreign Selling
If the fundamentals are strong, why has the sector faced such heavy headwinds? Jain pointed out that the challenge lies entirely in ownership and market flows rather than operational failures.
Large banks have traditionally been the most “over-owned” sector by foreign institutional investors (FIIs). Consequently, during the recent market downturn, this sector bore the brunt of intense foreign selling. Jain cautioned that this selling pressure “may still continue for some time.”
The Long-Term Outlook
While short-term capital flows and foreign sell-offs could keep the sector volatile in the near term, Jain is confident about the horizon. For patient investors capable of looking past temporary market noise, the combination of 17% credit growth, expanding working capital needs, and deeply discounted price-to-book multiples makes large banks a compelling, resilient bet for the long term.