The Hindu : Bank stocks in the limelight

Online edition of India's National Newspaper
Saturday, Sep 13, 2003

Business

Business

Bank stocks in the limelight

By C. R. L. Narasimhan

Public sector banks ought to count far more than their market valuations.

Public sector banks have been in the news, for a change, for the right reasons. In line with the generally bullish trend in the stock markets, bank stocks have been in the limelight. Earlier, investors seemed to be to interested in just two bank stocks, those of the two `new generation' private banks, HDFC and ICICI. For public sector banks including State Bank of India it has been a mixed experience at the stock markets. A handful of them — SBI, Bank of Baroda, Corporation Bank, Oriental Bank of Commerce — have traditionally commanded decent valuations but as any discerning investor would have noticed they were, as a rule, grossly undervalued. Leaving out SBI that is in a separate category, banks such as Bank of Baroda and Corporation Bank were quoting below their initial public offer price, the price at which a large number of investors were allotted shares after the public issues. It is only now that investors seem to have taken a fancy to these stocks, boosting the share prices to well above their original issue prices.

By far the bigger transformation has occurred in the market perception of the stocks of those PSBs that were considered weak. Both IOB and UCO — two banks, which not so long ago were considered weak — have successfully accessed the capital markets very recently with share offerings of Rs. 240 crores each. What is surprising is that both the banks had offered their shares at a premium. IOB's was at an impressive Rs. 14 and UCO's at Rs. 2. Few doubt that the general predilection for bank stocks has favoured these two banks. IOB's maiden offer was exactly three years ago: its IPO at Rs. 10 barely limped through with not a little support from its more traditional stakeholders, the borrowers and of course the depositors. It was widely commented at that time that the sale of PSB stocks at such abysmal valuations was not the right course either for the Government owner or for that matter the banks themselves.

So what has changed since then? One tends to give credit to the various reform measures. The financial sector system is more competitive today than at any time since the start of the reform era. Banks have more clout in realising their dues — the Securitisation Act is just one of the several measures put in place — the corporate debt restructuring mechanism (CDR), debt recovery tribunals being some of the others. More important perhaps are the tightening of accounting norms and bolstering capital adequacy standards.

Those have been continuing processes and made the banks acutely conscious of core profitability issues. Then there are ownership issues.

The Government has been contemplating a reduction in its stake in all PSBs. Over time it wants to hold no more than a third. (However, the Government has said that their public sector character will be maintained even then). There is far greater leeway for foreign direct investment into the banking sector, although for now the relaxation is in the case of private banks only.

Standard & Poor's, the international rating agency, and its domestic partner Credit Rating and Information Services of India (Crisil) have both been upbeat over the recent performance of public sector banks. The latter, after a detailed study of 18 public sector banks says that their core profitability has been maintained last year.

Both deposit and lending rates have fallen, the former to a greater extent. Hence the banks' `spread' was not only protected but also enhanced. Besides, in a falling interest rate scenario all banks booked extraordinary treasury profits. That may not be possible however even over the near term.

Now the big question: Have the stock markets finally recognised the true worth of PSB shares? Not many investment analysts are willing to bet on the market's infatuation continuing for long.

Most of the positive recommendations for the recent share issues (of UCO and IOB) were only for the short-term. Unless there is a radical transformation in the ownership patterns, if at all the Government lets go the control, it is likely that a majority of the PSB stocks would cease to have investors' fancy.

There is a message in all this: the bank managements ought not to view the present buoyancy in their stock prices as a true guide to their performance. Given their legacy PSBs ought to count far more than what the share market credits them with.

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