Private Banks Have Gained And PS Banks Have Lost More Due to Stimulous Package

Private banks' value two times PSUs'

A long-term portfolio of private banks will outperform the Bank Nifty

Devangshu Datta / New Delhi Jul 29, 2012, 00:15 ISTPublished in News Paper namely Business Standard India’s banking system has its pockets of excellence and pockets of incompetence, and everything in-between. The regulator, RBI, does a reasonable job but there is also a fair amount of political interference. Commercial interest rates are set by banks themselves, and policy rates, cash reserve ratios (CRR), sector lending limits and sectoral risk-weights are set by the RBI.  But there are hangover regulations pertaining to the number of physical branches. The commitment to priority sector lending at lower rates essentially means banks have to give away a lot of money. Cooperative banks aren’t controlled with any degree of rigour. The political interference is more blatant with public sector banks (PSB). There are also classic principal-agent conflicts between the best interests of PSBs and of their management. Promotion and other rewards for PSB officers are easier to by if politicians are satisfied, whereas the best interest of a bank lies in creating a healthy balance sheet. In addition, PSBs bear the brunt of lending to bankrupt entities such as state electricity companies and distressed PSUs like Air India. There are also high levels of moral hazard; a PSB has an assurance of being bailed out in case of trouble. This results in a dichotomy. As a class, the balance sheets of PSBs are shakier and their key ratios considerably worse than private sector banks. The PSBs are also much lower valued as a group. Private sector banks take normal commercial risks. They do enter into speculative transactions and they tend to be quicker off the block in terms of entering new business segments. This can result in over-extension and ballooning bad debts and sometimes in exposures to dangerous assets such as forex derivatives. But the interests of private bank officers and the banks are better aligned and on the whole, the risk management of private banks is better. When private banks have found themselves straying into dangerous territory in terms of high non-performing assets (NPA), they are more likely to diagnose the dangers and change course internally. The differences in performance and valuation are accentuated during a downturn. In fiscal 2011-12, the gross NPAs of PSU banks grew by over 50 per cent while the gross NPAs of private sector banks grew by 3 per cent. Overall, as a percent of advances, gross NPAs for PSU banks were around 2.5 per cent in 2011-12, while the same ratio was 2.2 per cent for private sector banks. Apart from recognised NPAs, banks also carry restructured loans. These are sticky corporate debts where terms have been renegotiated through mutual consent. These are not treated as NPAs on the balance sheet. But they are much more risky than normal advances, offering lower yields and standing a much greater chance of turning bad. There’s been a spate of restructuring requests over the last year and the lion’s share has involved PSU banks as the creditors. The differences in valuation and share price performance over the past few years is stunning. There are several publicly available indices one can track for the entire banking sector, and for the PSU banking segment. Unfortunately, there is no public index of private sector banks. The CNX Bank Nifty (which comprises both PSU and private banks) is up about 2 per cent since January 2008, a 55-month period. The CNX PSU Bank Index is down 13.5 per cent over the same period. The average valuation of the CNX PSU bank index has been a PE of 9.3 with a maximum PE of 16 for the basket and a minimum of 4.5.  The average valuation of the Bank Nifty is PE 15 and the maximum was PE 27.5 and the minimum, PE 6.25. One could create an index of private sector banks using either the methodology of weighting by free float (as in the BSE indices) or by total market capitalisation as in the NSE indices used above. But it’s not necessary given the above differences. The private sector banks enjoy valuations twice as high. In terms of capital gains too, they have given far better returns. Given the underlying reasons for the differences, the trend is likely to continue indefinitely. The RBI's Credit Policy this Tuesday (July 31) will affect the sector as a whole. There may be a rate cut pushing up bank valuations temporarily. Or, the RBI may hold its ground. A rate hike or CRR hike seems very unlikely. Regardless of what the RBI does, the long-term investor can bet that a portfolio of private sector banks will continue to consistently outperform the Bank Nifty. http://www.business-standard.com/india/news/private-banks%5C-valuetwo-times-psus%5C/481689/ I wrote a few  days ago on the same line and many times on different issues related to bank run by government .Language of my write up  may not be so good and may not contain the data pertaining to mess in banks in support of my conclusion but there is truth that state run banks are not in good health and all relaxation given to banks to bring about improvement in health is used and exploited by private banks. This is why private banks are growing by leaps and bounds whereas state run banks are facing acute crisis and their survival is at stake in the same way as state run telecom giant BSNL,MTNL,Airlines, Railways and other PSUs are . Private banks function in the same atmosphere under same rules and regulation , in same policy framework set by RBI and Government of India ,in the same market ,and with the same people of India as state run banks are to function. Still it is mostly CEOs of state run banks which accuse global recession and natural calamities for their growing sickness . THURSDAY, JULY 26, 2012 What Wrong Finance Secretary Mr. Mittal IS Doing? This refers to editorial published Today the 27th July 2102 in Economic Times  titled as “Leave Banking Be”. It is true that Mr. Mittal has issued many guidelines in last few months against the tradition of his predecessors who were silent spectators of all right and wrongs of bankers. During last two decades and more of reformation era, public sector banks have Contributed more and more bad assets, caused continuous erosion in capital, recruited persons in bank by committing fraud with laid down policies, promoted culture of flattery and bribery, promoted corrupt officers to higher scale to perpetuate corrupt practice, indulged in fraudulent game to increase profit and banks did not even make provision for terminal benefits of employees, did not provide for pension, concealed Bad assets to reduce provisioning load and to inflate profit, resorted to window dressing to achieve deposit and lending targets set by ministry of finance, offered high rate of interest to corporate to acquire bulk deposits even for short term , Credit growth , business growth and profit growth shown by a few banks rightly or wrongly is ranging from 10 to 15 % whereas that of private sector new generation banks is ranging from 25 to 40%. On the contrary Gross NPA has been increasing in state run banks every quarter but that of private bank is coming down. sanctioned loans to  corporate even at sub PLR rate at the cost of profitability of banks forcing RBI to prescribe Base rate mechanism,  resorted to investment in mutual fund to earn profit by speculative tactics, instead of recovering money from defaulters , thought it better to sell bad assets to ARC or subsidiaries, resorted to short term unsecured loans to corporate to achieve the target, increased deposit by debiting unavailed portion of cash credit account limits to inflate advance as well as advance figure, did not sanctioned loan to weaker section,farm sector,industrial sector  did not sanctioned loan to agriculture sector to the extent government of India desired,  resorted to finance to Micro Finance Institutes to achieve target under Priority sector and MFI in turn sanctioned loan to weaker section at exorbitant high rate of interest. .Loan to pensioner at more than 16% and to car purchaser at 11 or 12% resorted to frequent restructurings and rephrasing  of loan to keep the same in Standard category despite inherent weakness in borrowers account, discarded banking activities and focused on non banking activities like insurance and demat services to earn non-interest income, manipulated balance sheet to artificially inflate profit , reduced  NPA by concealment not by recovery and thus saved provisioning to book higher profit in an illegal way and distribute this ill earned profit as dividend among investors and win the heart of Ministry of Fiance and so on. To read more please click on following link http://jaindanendra.blogspot.in/2012/07/what-wrong-is-finance-secretary-mr.html