The story of public sector bank valuations - Hindustan Times

The story of public sector bank valuations

ByJanmejaya Sinha
Sep 06, 2021 07:07 PM IST

Markets discount State ownership. The government should boldly reduce its stake to 26% in five PSBs and privatise the other six public banks

Over the past five years (2017-21), bank credit has grown at 6.45% compared to 14.75% in the six years (2011-2016) prior to that. This level of credit growth is too low for a developing economy. But Indian banks, suffering from the overhang of non-performing assets (NPAs) accumulated post-2010 due to heavy lending to infrastructure, and pushed to clean up their credit portfolios, needed to conserve capital after provisioning for defaults, slowing credit growth.

Representational Image. (File photo) PREMIUM
Representational Image. (File photo)

After more than five years of clean-up, data on August 27 shows an improved picture of public sector banks (PSBs). After four years (2017-20) of negative returns, this year was the second year of profits for PSBs. In 2021, the return on assets (RoA) turned positive and it improved further this August to 0.5%. Similarly, return on equity (RoE) at 7.9% this year was a significant rise from its low, of negative 13.8%, in 2018. The negative spread of 2.9% compared with private sector banks (private bank earned average RoE of 10.8%) was much narrower than the 21.8% spread (PSB negative 13.8% compared to positive 8% for private banks) in 2018.

But despite the improvement in PSB performance, the markets are still quite harsh in their valuations on PSB stocks.

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Consider this. The total market capitalisation of 11 nationalised banks (excluding State Bank of India) today is 259,000 crore or about $35 billion. These 11 nationalised banks hold 68.7 lakh crore of deposits and have total advances of 38 lakh crore. State Bank of India (SBI) has individually got a market capitalisation of 368,000 crore and holds deposits of 37.2 lakh crore. The private sector bank, HDFC, on the other hand, despite the continuing Reserve Bank of India (RBI)’s restrictions on it for “multiple glitches in the banks internet and mobile banking systems”, has a market capitalisation of 857,000 crore, with just 11.5 lakh crore of deposits. This is almost 3.3 times more than all 11 PSBs combined. What is even more striking is that Bajaj Finance (a non-bank finance company, without a banking licence) has a market capitalisation of 417,000 crore or around 60% more than the combined value of the 11 PSBs.

If we conduct a simple thought experiment and take the combined deposits of the 11 nationalised banks (not counting SBI), and presume they obtained the same valuation as HDFC bank got for each rupee of deposit held with them, then their market valuation would rise to a massive 51.1 lakh crore or $685 billion. Assume that they only got half the valuation of HDFC bank, that would still be over $300 billion. To put that in context, the current asset monetisation programme announced by the government identified just 600,000 crore or $80 billion dollars of assets, and the target for 2021 set by Niti Aayog is 88,000 crore $11.7 billion.

This illustrates the opportunity for India. That is why the finance minister’s budget announcements this year, of privatising two PSBs and one general insurer, are so bold and transformative. The development needs of India can be furthered by such thinking. The constraints that PSBs suffer due to majority government ownership have been well covered many times before. Even if the current government can continue to push them to better performance, as they are doing, the market discounts the ability of PSBs to sustain performance, seriously compromising their valuation.

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The finance ministry’s refreshing new thinking allows for a complete reset. If the government just retained SBI as a majority-owned government Bank, and became the single-largest owner of Bank of Baroda, Punjab National Bank, Union Bank, Canara Bank, and Indian Bank, bringing down its stake to 26%, it would dramatically improve their valuation. The market would reward the lifting of the constraints under which they operate — greater freedom in personnel policies and the removal of the stifling Central Vigilance Commission and Central Bureau of Investigation oversight. If their price-to-book ratio even became the same as that of SBI, it would lead to a tripling of the valuation of these 11 banks, currently trading at 0.5 price-to-book.

That would mean their cumulative valuation would increase from 158,000 crore to about 475,000 crore.

If the government decided to sell its stake in these five banks of 26%, it could generate 100,000 crore. It would first need to reduce its stake below 50%, and then sell its remaining stake in tranches of 5% till it reached the 26% threshold to capture full value. This would just be the monetary benefit that would accrue to the government without any loss of control in these banks. The remaining six PSBs, which are much smaller, could actually just be privatised, fetching another 100,000 crore, even at just their current valuations.

In the political economy of India, transformative reform is never easy. In fact, it is very creditable for the finance ministry to put such bold ideas on the table. Such reforms will no doubt be contested and opposed. Pushing them through may take more time than originally anticipated. However, the will to go forward with them should not be lost.

If a government can push through the Goods and Service Tax, bringing its ownership down to 26% in five PSBs and selling the other six PSBs cannot be that hard. Such a reform will be very beneficial for the economy and introduce much greater efficiency in the entire sector. The government should just do it.

Janmejaya Sinha is Chairman-India, Boston Consulting Group

The views expressed are personal

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