Would you prefer a big bank over a reliable bank?

Mar 23, 2013

In this issue:
» More reasons to buy gold
» Will natural gas reserves save Cyprus from bankruptcy?
» Why do MNCs want to delist profitable arms?
» How about a European Union for BRIC nations?
» ...and more!

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Where do you park your hard earned money? The answer to this could be as many as the number of readers. Fixed deposits, bonds, stocks, mutual funds, gold and real estate are the many forms in which the savings may be invested. But even after hundreds of years of financial reforms it is the bank that is the first point of contact for a saver or an investor. And hence it is his bank that a person first places trust on. The government and Reserve Bank of India (RBI) recognize the fact that for a nation of savers like India it is pertinent to have a well penetrated banking system. Thus the focus on financial inclusion.

But what if the banking entities fail to live up to their trust worthiness? What if the depositors feel unsafe about their hard earned money? A run on banks is one of the biggest economic catastrophes in today's time. The tiny nation of Cyprus came close to witnessing one in recent days. The revelation of money laundering in three of India's largest private sector banks also gave Indians a scare. One would even recall depositors, including large corporate, shifting money from private to PSU banksin the aftermath of 2008 crisis. Hence the kind of bank that one would want to trust is a very important decision.

The government of India has on multiple occasions stressed on the need to consolidate Indian banking sector. It believes that smaller players, especially in public sector, are not geared enough to support the needs of a growing economy. Plus that corporate and retail depositors would want to bank with entities having large balance sheet sizes. Even the fact that no Indian bank comes close to claiming the size of monolithic balance sheets that some Chinese ones have, seems to disappoint the Finance Minister.

That State Bank of India (SBI) will eventually be merged with its associate banks is no news. But it seems Mr Chidambaram is also working on merger plans for 5 other PSU banking entities. In the past too, merging weak banks with stronger ones has worked in favour of depositors, if not shareholders of the bank. Hence we can understand the compulsion of the government to merge the weak entities before it is too late. But should India ape the Chinese even when it comes to creating monolithic banks? Or for that matter would big banks be more trust worthy than their smaller and nimble peers? Chinese banks for one have a very poor reputation in terms of transparency and asset quality. Hence the desire to create such entities is misplaced. But most importantly, would depositors want to trust such big banks. Having witnessed the fate of too big to fail banks in the West, we would rather recommend trusting small and transparent banks with sound managements.

Would you prefer a big bank over a small but reliable one? Please share your comments or post them on our Facebook page / Google+ page

 Chart of the day
Stock markets in the US have recently touched their all time high. The Dow Jones has breached the levels that were last seen during the peak of 2007. In fact not just the US, but many other stock markets globally are inching closer to their all time highs. The BSE Sensex is currently about 11% lower than the all time high (around 21,000) touched in January 2008 and then again in November 2010. China on the other hand has a long way to recover. The benchmark Chinese index is currently a good 62% lower than the peak. Greece, which is currently under a cloud of economic uncertainties, has its benchmark index more than 80% lower than the peak levels.

Source: Equitymaster, Economist

The correction in the price of gold had reinforced the faith of people who thought that the bull run for gold had come to an end. Many investors and experts were of the opinion that the Eurozone crisis was easing off. At the same time US was showing signs of recovery. As a result, people stated that the there was little need to run after a safe haven like gold. These people and experts were far from being right. The recent problems in Cyprus are testimony to the fact that Euro troubles are not over. They are just being postponed to another date. Therefore the argument that a 'safe haven was not required' no longer holds.

In addition to the troubles of the Euro zone, particularly Cyprus, there are also other factors that support the strength of gold. Demand from China and India, the largest markets of gold, has grown in recent times. As per Reuters, India's gold imports in January 2013 increased by 23% YoY. Demand from China too has not seen a fall, though it has not seen an increase either. Therefore as long as the demand for gold remains strong, prices would eventually follow. It is just a matter of time. Investors would therefore do well to use the dip in prices as an opportunity to pick up gold for their portfolios.

Cyprus is on the verge of bankruptcy and is fast running out of options. So will the discovery of this natural resource turn the tide in favour of the country? Indeed, at the end of 2011, American firm Noble Energy discovered a natural gas field off Cyprus' southern coast. Estimates are that the field could yield between 5 trillion and 8 trillion cubic feet of gas. By international standards this is a small field. But given that the size of the country itself is small, this field should be able to yield sufficient gas for the country. But it is too soon to say that this development will rescue the country from its financial woes. Simply because developing gas fields is an expensive and time consuming process. Wells will have to be drilled; pipelines laid to transport gas from the field to Cyprus and liquefaction plants will have to be put up. All of this will cost billions. In the longer term certainly this gas field is likely to benefit Cyprus immensely. But the country at present is plagued with cash problems and it simply cannot rely on the development of this gas field to bail it out of trouble.

Last year, theme-based investors were making a beeline for stocks that were delisting candidates. One of the major triggers for this was the minimum public shareholding norm. As per the norm, all listed non-PSUs must have minimum public shareholding of 25% by June 30, 2013. For PSUs, the minimum requirement is 10% by August 31, 2013. There are about 14 listed PSUs and 176 listed non-PSUs that are yet to comply with these norms.

Many investors thought that this norm would force MNCs with high promoter shareholding to delist. So went on a buying spree for all such MNC stocks. They thought that the MNCs would ready to pay any price to get delisted. Yes, some investors did make money on stocks that got delisted. But this was not the case with all such stocks. In cases where the delisting did not materialise, investors lost money heavily.

As per an article in Business Standard, MNCs tend to be more aggressive when it comes to delisting their profitable Indian subsidiaries from the local stock exchanges. On the other hand, they are less persuasive when it comes to smaller or less profitable subsidiaries.

In our view, this kind of investing is highly speculative and hence, very risky. We do not believe in trying to guess the promoter's mind. We like to stick to the good old principles of value investing. Buy a stock because for its intrinsic value and not based on a future event.

How about a European Union for BRIC nations? Can these diverse economies work together? Well, leaders from the major emerging economies may be planning to create a joint forex reserves pool and an infrastructure bank. Brazil is leading the effort on the proposed reserve pool. India and South Africa are working on the creation of the development bank which would finance mainly infrastructure projects. Emerging market nations are frustrated at having to rely on the World Bank and IMF for their needs. These organizations still reflect the interests of the US and other industrialized countries which have a bigger representation. The reserve pool would be available to emerging economies facing balance of payments difficulties. Or it could be used to stabilize economies during periods of global financial crises. The infra bank would support the developing nations' need for new roads, modern ports, reliable power and rail services. Well, we really hope these proposals take off the ground. China has moved light-years ahead in terms of infrastructure. The other nations, especially India have a lot to catch up on.

Global markets closed the week in the negative with China being the only exception. The Cyprus bailout crisis was a major cause of concern for global investors. It is feared that collapse of banking system in Cyprus might slow the growth of the Euro economy. However, in the US, strong corporate earnings provided some relief to the falling stock markets. The US stock markets ended the week on a flat note.

Indian stock markets traded in the red for most part of the week and finally ended lower by 3.6%. This was largely due to political uncertainty arising out of the withdrawal of a key ally from the Union government. The Cyprus crisis too spooked investors.

Source: Yahoo Finance, Kitco

 Weekend investing mantra
"A good business is not always a good purchase - although it's a good place to look for one." - Warren Buffett

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    11 Responses to "Would you prefer a big bank over a reliable bank?"

    Rajeev Maheshwari

    May 2, 2013

    For me big Bank [surely Bank size in Assets] does not matter. Surely safety and reliability is more important. When it comes to money laundry, this is a Political and developed country money game.
    I like Private Bank compare to PSU Bank due to service and communication. However money has to be kept in two different Bank for Saving/Salary purpose and Fixed Deposit /PPF basis. Because keeping all eggs in one basket is always carry high risk.I am sure people have not forget the Bank BCCI failure run by some special people and majority minor has lost heavily.
    Read BCCI Scandal:
    The Bank of Credit and Commerce International was the brainchild of Pakistani businessman Agha Hasan Abedi, who envisioned a bank focused on the third world. It was set up in 1972 with financial backing from Abu Dhabi, where the ruling family, headed by the late Sheikh Zayed, was said to have a very close relationship with the BCCI.

    The emirate was the bank's largest depositor, largest borrower, and for most of its existence its largest shareholder. Ultimately a settlement with Abu Dhabi also provided almost half of the funds recovered for creditors.

    The bank set up in the City, with offices at 100 Leadenhall Street, close to the Bank of England, and went on to open 22 UK branches.

    The rapid growth unsettled some regulators at Threadneedle Street. As early as 1982 one internal memo described BCCI as "on its way to becoming the financial equivalent of the SS Titanic!".

    However, the late governor Eddie George, above, and his bank supervisory team persuaded themselves that ultimate regulatory responsibility for the group lay with Luxembourg, where the bank was incorporated.

    This decision led liquidators to sue the Bank of England, alleging regulators had acted with malicious recklessness. The action was a costly disaster, most notable for a 119-day speech — thought to be the longest in British legal history — delivered by counsel for the Bank Nicholas Stadlen QC. The claim was ultimately abandoned, with BCCI creditors bearing the Bank's £74m costs as well as a £57m legal bill for its own legal team.


    Prakash Holla

    Mar 24, 2013

    I only have a SB ac with Karnataka Bank. Low NPAs. 25-30% solid growth each year. Ably led by a solid team lead by Ananth Krishna. No promoter group but shares held in small lots by brahmins of Karnataka coast. KBL does not issue credit card. Use your own money via atm/ debit card!
    Why should I go for a lootera bank like Citi, HSBC, ICICI ???
    Why should I go for a heavily under staffed, under trained, overworked bank like SBI where a routine transaction takes 30 minutes? It took me (IIT IIM grad) 5 months to get my mother's PPF even after showing nomination.



    Mar 24, 2013

    Imitating China or US for such decisions are blunders of the century. We should do what is suitable to Indians and our culture (and not to some corporates- for them their is Consortium as in the case of King Fisher Airlines). we can not experiment with the economy and banking, when we have examples of GLOBAL TRUST, UNIT TRUST OF INDIA and LIC HOUSING in the finance sector. Indira Gandhi was forced to nationalise the Banks(and did not merge them) for a reason- Banking sector was being exploited by the then Corporates.Read history of banking. Remember that the number of recent Bank failures in the west ! It has crossed hundreds !



    Mar 23, 2013

    no,i would prefer a reliable bank


    cv krishnakumar

    Mar 23, 2013

    India should have big banks; even SBI is a small player on the global arena.
    Also one correction. SBI is NOT being merged with Associates, it is the Associates that are smaller and would eventually be merged with the parent bank ie., SBI.


    cv krishnakumar

    Mar 23, 2013

    India should have big banks; even SBI is a small player on the global arena.
    Also one correction. SBI is NOT being merged with Associates, it is the Associates that are smaller and would eventually be merged with the parent bank ie., SBI.


    HG Sharma

    Mar 23, 2013

    Monolith , certainly may not be the right answer. What is required is common rules ,guidelines ,procedures ,inter operability ,similar to what we have in Railways will certainly enhance customer satisfaction and service to nation.



    Mar 23, 2013

    Sir, Urgent comment on Pharma sector progress in your report. Some news came that Aurobindo Pharma got approval from USA to sell their some valuable drugs. How will be the share grow?


    Govind Ved

    Mar 23, 2013

    Traditionally, in India PSU Banks are preferred for deposit and transactions. Being a vast country ,there are not many private sector banks in remote areas of India whereas State Bank of India has vast presence. Besides, people used to understand the safety of deposits with PSU Banks being government banks.
    So far as size of the banks are concerned it is to be noted that there is not a single private or PSU bank which has gone to liquidation in India ,whereas in USA the picture is some what different. Can It be attributed to cautious approach of banks as well as Indian Public at large.


    sharad sharda

    Mar 23, 2013

    A person maintains a bank account always on trust. In trust, size never matters, It is the belief of the customer which matters most.

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