Banking versus insurance group: Which is a better bet

ShareSansar, May 13:

The insurance group is growing at an unbelievable pace over the recent months. Just a couple of weeks back, most of the insurance company scrip were trading at cut-to-cut circuit level, in many cases irrespective of financial health of the companies—mainly on the hope of high returns in future.

If we look at tables of insurance and banking groups’ price movement we see that the insurance group has surged by massive 356.21 percent i.e. from 807.3 points to 3682.99 points over the past one year. It has grown by massive 1466.59 points or 66.18 percent over the past three months alone.

On the other hand, the price of scrips of the banking group, which covers more than 80 percent of the total market capitalization, simply is teetering on the brink of downward spiral.

The banking group, which stood at 489.48 points in last May when the market was at one of its nadirs, has risen to just 747.8 points as of now. The group has decreased by 5.27 points or 0.7 percent over the past three months.

The unprecedented growth of the insurance scrip — both life as well as non-life insurers --  even saw many investors square off good BFI stocks even in loss to clinch the insurance scrip, especially the younger companies which are not as very expensive as the well established ones.

The Insurance Board officials were wary of the “unrealistic growth” of the insurance scrip while market analysts were concerned since the trend to switch to insurance scrip at the cost of good as well as undervalued BFIs scrip would only delay or thwart the stock market from reaching a new high, and to complete the bullish cycle.

Thankfully over the recent days, the BFI scrip are slowly rising, but the insurance sector growth is still way too high.

“Common sense must prevail. How can investors afford to blindly invest in scrip of even those insurance companies that are in loss,” says a highly placed source at Insurance Board. “We cannot control the stock market. We sincerely urge the investors — please become prudent. Many of you are apparently risking your money.”

He also clarified that the Insurance Board does not have any plan to ask the life insurance companies to shore up their paid-up to Rs 2 arba and the non-life insurer to raise it to Rs 1 arba anytime in near future.  

“The only directive we have issued to the insurance companies is to ask the life insurers to raise their paid-up to Rs 50 crore and the non-life ones to raise it to Rs 25 crore,” he adds. “Even the proposed new Insurance Act, which is due to be passed by parliament, does not envisage a paid-up of more than Rs 1 arba for the life insurers.”

The rumor about the paid-up requirement is basically fuelling the insurance group.

But then if we are to follow the speculations, then the central bank is also expected to ask the commercial banks to raise their paid-up to Rs 5 arba as per BASEL-III.

What all the stakeholders, including leading investors and brokers, all agree is that the fear harbored by the investors regarding promoter share conversion of the BFIs is the another major factors that are stemming investment in the banking scrip.

But a comprehensive study conducted by ShareSansar on the actual status of promoter share conversion reveal that the situation is not as bad as many investors fears. Click here for the detail.

It is in the utmost interest of the investors to properly compare at least the leading BFIs and insurance companies to understand whether the banking or the insurance group is a better group in terms of key investment indicators such as net profit, EPS, net worth per share as well as dividend payout.

 The tables below pertaining to dividend payout of both the groups clearly show that the banking group by and large is better than the insurance ones when it comes to returns.



Table 1: Insurance Companies' dividend payout of past three fiscal years.

*These companies had issued right shares in this fiscal year.

Table 2: Insurance Companies' dividend payout of past three fiscal years.

Going by the financial reports of the last  fourth quarter as well as the second quarter of the current fiscal, the good companies of banking group are again faring better than the leading insurance companies in terms of EPS and net worth per share. See go through the tables carefully.

Table 3: Financial indicators of Banking companies

  (In Rs)

Table 4: Financial indicators of Insurance companies

  (In Rs)

In spite of the better picture of the banking sector than insurance in terms of return and financial health, the price movement of these two sectors’ shares depicts otherwise, which we can observe from the table below.

 
Table 5: Price of the banking scrips from 2nd May 2013 to 12th May 2014

Table 6: Price of the insurance scrips from 2nd May 2013 to 12th May 2014

Having considered all these hard facts and figures, we can,  in the final analysis, choose the better bet.