Saturday, May 21, 2016

Banking Sector's Indian Waterloo

Long after the subprime crisis in the USA had passed into the public's short term memory as a blip although it merely happened just eight years ago,Indian Public Sector Banks have brought out a lot of skeletons from the closet.

Overall banking earnings down 98%
Seven Public Sector Banks slipped into the red.during the quarter.
Punjab National Bank(PNB) set a record for the highest quarterly loss ever in Indian banking history.
Syndicate Bank wrote off Rs 8 billion due to a four year fraud.The Bank's Chairman and former director were arrested in a cash-for-loans scam in 2014.

Having myself worked in IDBI Bank,I have seen the restrictive practises,Government intervention,lack of autonomy and political leanings that do not allow the average manager on the ground to utilise his or her talent or even policies that work.When coupled with an unscientific merger between the lending institution – IDBI,its obvious that the organisation could not find direction and focus on its strengths.

Almost all PSU banks face militant trade unionism,lack of low cost deposits,exposure to high risk corporate lending or farm lending leading to lower margins than their private sector competitors.
They have also been used as the Government's very own “piggy”bank and dispenser of favours to businessmen of all hues.

The Vijay Mallya fiasco is but a small saga compared to the mountains of debt of some other corporate houses.Truly its the small guy/businessman/individual who faces scrutiny and remains cut off from credit where the businessman with political connections can scim of billions even with failing businesses(as seen in the Kingfisher airlines case).

So who amoungst the PSU banks will survive this crisis?

At this point the only survivor looks like State Bank of India.Merging its associates is the first step.Making it technology driven with more professional managers in the middle management would allow it to benefit from its strong and large customer base.

Although it does offer other financial services,none of the divisions have toplines large enough to matter.Nor has it successfully pushed the digital wallets or even e-banking till date.

Raghuram Rajan and the RBI has been commendable in forcing these PSU banks to provision for the NPAs but a lot more needs to be done and at least four to six quarters before anything could be said with certainty.

Do not be fooled by cheap valuations and cheaper stock prices.Most of these banks are trading below book value(BV).The key question is not why they are below book value.

The key question is 'WHAT IS THE ACTUAL BOOK VALUE'.

So everytime your broker recommends you to invest in them,this is what you should ask them!