Public sector banks are sitting on a bonanza
An improved macroeconomic environment, the government’s policy push, and transformation efforts by public sector banks helped them post impressive results. Act on this opportunity
Until the money jingles in your pocket, it’s only on paper,” a unicorn founder mentioned to us the other day. The government should pay heed to his comment. The improvement in public sector banks (PSBs’) performance offers it a golden opportunity. The performance of PSBs this quarter shows a great improvement over last year. If we take a three-year view, this improvement becomes even more stark — a loss of about ₹92,000 crore in FY19 turned into a profit before tax (PBT) of over ₹93,000 crore in FY 2022. What happened?
Three factors help explain this welcome development: The improvement in the macroeconomic environment, the government’s policy initiatives, and individual banks’ transformation initiatives.
First, the macroeconomic environment. By 2021, the twin balance sheet problem of banks and large infrastructure companies had largely been settled. India recorded a decadal high net credit growth of over 16% in Q1 FY23. All four segments — retail, agriculture, micro, small and medium enterprises (MSMEs) sector, and corporate — showed double-digit growth. The clean-up of bank balance sheets and improved economic prospects showed incipient signs of corporate capital expenditure, as capacity utilisation in most sectors crossed 70%. Coupled with the government’s push on infrastructure — PM Gati Shakti, National Infrastructure Pipeline, and National Monetisation Pipeline — PSBs were in an enviable position to create portfolios with their choice of riskreward trade-off.
Second, policy initiatives. Few in India appreciate that the technology stack created in financial services is the world’s best. The credit bureaus (such as CIBIL) have democratised retail loan availability, and there is barely any difference between the non-performing assets (NPAs) of PSBs and others in this area.
See the facts: Over 1.35 billion Aadhaar numbers and over 50 million daily Aadhaar-based authenticated transactions; affordable data and enhanced digital mobile connectivity that will grow faster with the 5G rollout; Unified Payments Interface that has made payments frictionless; over 30 million B2C merchants are accepting Quick Response codes (facilitating formalisation at the most micro levels of commerce); and customer data is being used in a policy environment which engenders customer empowerment through an open credit enablement network and account aggregator frameworks. As a result, Indians will be data-rich before they are affluent. The government policy is focused on allowing them to profit from their data rather than companies (as in the United States) or the State (as in China). In addition, the push on asset reconstruction companies to house bad assets has also made the balance sheet clean-up faster.
In addition, PSB-specific government policy initiatives have also paid off. PSBs have been recapitalised and consolidated. Consolidated banks are starting to do well, with some seeing their return on assets go over 1%. The oversight from the financial services department through the enhanced access and service excellence (EASE) programme shows encouraging results. One further reform of delegating CEO appointments to the respective “strengthened” bank boards with CEO incentives going up to 300% of the fixed pay as per the Reserve Bank of India’s norms for private banks, could help consolidate its policy gains further.
Third, individual bank initiatives and transformation. The CEOs of several PSBs have taken decisive action to improve their banks, investing in technology, processes, talent systems and governance. For example, State Bank of India (SBI), Punjab National Bank (PNB), Canara Bank, Bank of Baroda, Union Bank, and Indian Bank increased their focus on digitisation, risk policies, back-office operations and targeted customer servicing and sales processes.
Some statistics are telling.
The PSBs cumulatively disbursed about ₹36,000 crore digitally straight through processed retail, agriculture, and MSME loans with 3.6 million digitally initiated leads. In addition, nearly 94 million customers are active on mobile banking (FY22), which is about 16% of the operative ordinary savings account base, compared to 4% (FY20). And these moves are gaining more traction and getting more investments across PSBs.
But despite the improvement in PSBs’ performance, the markets still have harsh valuations on stocks. The price to book (p/b) of large PSBs other than SBI is below 1 (this is a measure of a company’s market value to book value, and therefore a ratio of less than 1 means the market may be undervaluing them), while HDFC, ICICI and Kotak Bank have p/b of over 3 and some closer to 4. SBI recently lifted its p/b to 1.8.
How could the finance minister raise PSB’s p/b and then take action to feel the cash jingle in the government coffers? The timing is appropriate. The Morgan Stanley Capital Index for emerging markets has increased India’s weight from 7% to 14.4%. This can attract stable long-term money into stocks on the index.
So, what will change the perspective on PSBs in line with their improved performance? How might the government get rewarded for its efforts? It could happen if the government decides to retain SBI as a majority-owned government bank and change its holding in the other PSBs to below 50% while remaining only the single largest owner. The market would reward this move as PSBs would operate with greater autonomy and independence and could push up their p/b certainly above 2.
If p/b of PSBs’ even became the same as SBI’s (1.8), it would lead to a doubling in the PSBs’ valuations, taking the government’s stake valuation from ₹3,13,000 crore to about ₹6,85,000 crore. Thereafter, if the government decides to sell its stake in just the five consolidated PSBs to 49%, it could garner ₹1,44,000 crore without any loss of control, and the current valuation would still be higher at ₹540,000 crore. Imagine that. I wouldn’t wait. Now is the time.
Janmejaya Sinha is chairman (India), and Ashish Garg, managing director and senior partner, Boston Consulting Group The views expressed are personal