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Banker
Of The Year BS
Round Table Innovate
& flourish The
Urge To Merge The
Vanishing NPAs Database |
Why are Indian banks so under-valued? ICICI Securities’ senior analyst Dipankar Choudhury attributes this to two reasons: First, the interest rate risk is comparatively high and no other country has such a high level of statutory appropriation by the government. Second, government interference in the functioning of banks leads to a lower value. The 20 per cent cap on foreign institutional investors’ (FII) exposure in public sector banks is also a dampener on valuations. Foreign investments in some private banks are as high as around 74 per cent. Incidentally, ICBC is controlled by the Chinese government which holds more than 72 per cent of the bank through investment companies. ICICI Bank’s MD and CEO K V Kamath feels that the market is discounting Indian banks’ capability of exploiting growth opportunities. “The real challenge before banks is that they must convince investors that they are capable of making the most of the India growth story,” he says. Ashwin Parekh of Ernst & Young has a different explanation for the undervaluation – the failure of Indian banks to value their underlying assets. “The Chinese banks had much higher NPAs than Indian banks but they also focused on the quality of collateral. Naturally, investors have the perception that there is a huge potential in the underlying assets. Unfortunately, this is the not the case in India,” he points out. In May, Ernst & Young estimated that China’s bad bank loans were about $911 billion, including $358 billion for the four largest banks alone. The official figures stand at $164 billion and $133 billion, respectively. The biggest handicap of the Indian banks is the lack of scale. ICBC has total assets of over $ 812 billion, close to the size of India’s GDP! Despite such large assets, the big Chinese banks have recorded annual growth rates of over 10 per cent in total assets over the past three to four years. State Bank of India, which accounts for almost one-fifth of the total banking assets in India, however, has an asset base of only $84 billion. The SBI is roughly one-tenth the size of the world’s biggest bank – Citigroup – on the basis of Tier I capital. Citigroup’s consolidated Tier I capital last year was $79 billion. For SBI, it was just $7.9 billion. To arrive at the consolidated tier I figure, capital and reserves have been taken into account and revaluation reserves and minority interest (that is the parent bank’s investment in group outfits) have been deducted from it. On this basis, State Bank of India’s global position is 72. It is not even within the first 10 big banks in Asia where the first three slots have been occupied by Chinese banks with each of them having a capital base of over $30 billion. In fact, six Chinese banks feature among the top 25 Asian banks, while India has only two representatives – SBI and ICICI Bank.
HOME Business Standard • November 2006 |
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