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Banking: Take your pick - Views on News from Equitymaster
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  • Nov 20, 2000

    Banking: Take your pick

    Banking sector in India is in a transformation phase. Recently the government announced its plan to reduce its holdings in 19 nationalised banks to 33%. The government is, however, reluctant to give away management control in the public sector banks. This in turn may not help in improving the efficiency of these banks.

    In the last week pubic sector banking stocks appreciated on the bourses in anticipation of dilution of the government’s stake. However, after the clarification by the government regarding management control, these stocks lost most of their gains. We have attempted to analyse the performance of select private and the government owned banks on the bourses.

    Private sector banks enjoy high valuations due to their proactive management and clean balance sheets. They have taken a lead in introducing new technologies. The value-added products offered by private sector banks have resulted in corporate clients migrating from the traditional banks to new generation banks.

    ICICI Bank took the lead both in the list of major gainer and major loser on the stock markets, as can be seen from the table. During the past one year the stock appreciated by more than 300% and in the last three months it fell by 28%. On the other hand Global Trust Bank and UTI Bank consistently outperformed the other private sector banks.

    Private Banks 1 year 6 months 3 months
    ICICI Bank 327% -28% -28%
    HDFC Bank 153% -8% -6%
    Global Trust Bank 147% 54% 94%
    UTI Bank 158% 26% 11%
    IDBI Bank 40% -19% 3%

    % Change compared to current market price

    On the other hand, public sector banks (PSBs) have been punished by the markets mainly due to the high level of non-performing assets (NPAs) in their books. Also, the absence of dynamic and proactive management, lack of autonomy for restructuring operations, overstaffing and unwieldy branch network are dampening their growth prospects.

    During the first half of the current year, PSBs recovered just 5.7% of the overall NPAs of Rs 536 bn. The recovery process was slow mainly because of higher percentage of priority sector lending (18% to the agricultural sector). The government regulations require them to lend to sectors where there is low growth opportunity resulting in large NPAs. These hurdles make PSBs an unattractive investment. While private sector banks have a net NPA to net advance ratio of 5.6%, the same ratio for PSB stood at 7.4% as on March 2000.

    The performance of most of the PSBs on the bourses was poor during the past one year. Stock prices of almost all the government owned banks declined. However, during the last three months except SBI all the banks in our study gained some buying interest. This could be due to the hope of disinvestment.

    Public Banks 1 year 6 months 3 months
    SBI -25% -29% -15%
    Corporation Bank -26% 7% 15%
    Bank of Baroda -35% 3% 12%
    Bank of India -42% -13% 13%
    Oriental Bank -31% -1% 10%

    % Change compared to current market price

    The trigger for investment in PSBs could come from an improvement in productivity, reduction in NPA levels, stabilising interest spreads, declining staff strength and good earnings growth. Private banks on the other hand will continue to enjoy higher valuations as long as they are able to adopt new technologies, maintain lower levels of NPAs and sparkling profit growth.



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