PSU banks narrow gap with pvt majors

MUMBAI: Public sector banks seem to be catching up with private sector players, going by the FY07 numbers. Not only have their margins improved, but their asset quality seems to be getting better, too. What’s more, most public sector banks have beaten the expectations of analysts and the market, this time round.

Says Religare Securities banking analyst Manish Agarwal: “Analysts were expecting some major pressure on net interest margins (NIMs) in the case of public sector banks like Bank of India, State Bank of India and Bank of Baroda. But, that does not seem to have materialised.”

Analysts attribute the flagrant display to the pricing power of public sector banks. Prudent management of provisions is also a major factor, they point out. Indeed, many had expected public sector banks to report larger provisions, which did not happen. “This strongly suggests that the asset quality of public sector banks is improving,” says Sarika Purohit, an analyst with Angel Broking.

But, this is not to suggest that private sector banks have done badly. Indeed, it is their consistency that commands premium valuations for them on the bourses.

As Agarwal puts it, “It only suggests that private sector banks’ FY07 performances were not surprising, whereas no one expected such great numbers from public sector banks. Overall, NIMs are better in the case of public sector banks.”

Public sector banks are also managing the incremental cost of funds better than private sector banks, barring UTI Bank and HDFC Bank. Their asset duration is getting shorter than deposits, which makes it possible for them to reprice their earning assets faster than private sector counterparts. In contrast, the asset profile of ICICI Bank shows that it borrows short and lends long, with much of it is in the long-term housing sector. “This results in asset-liability mismatches and slower repricing responses,” a banking analyst from a Mumbai brokerage points out.

The proportion of current and savings accounts (CASA) is also a factor. With higher CASA, public sector banks clearly have an upper hand in managing their operational costs. “That is why we saw a huge rally in public sector bank stocks recently,” says Religare’s Agarwal.

Interestingly, public sector banks are also closing the valuation gap with private sector counterparts. And this has happened just during the last month and a half, once the results announcements started coming in. For evidence, taking the price to book value of public sector banks as 100, the highest mean valuation of private sector banks was 273 sometime ago, which meant a premium of 173. This premium has come down to 130 now.

“The private sector banks are not getting downgraded, but the valuations of public sector banks are getting upgraded,” Religare’s Agarwal points out.

All the same, a few analysts do not subscribe to the public-private dichotomy. Their contention: in terms of growth, private sector banks are better, since public sector banks get evaluated on a higher base and seem to have reached their  peaks.

Says an Ask Raymond James analyst: “Though margins are better in the case of public sector banks, the gap in the valuation between them and private sector banks will always remain.” This is why it is not right to ask who is doing better, these analyst avers. They say it is prudent to look at the banking sector as a whole or look at individual bank numbers.

Seen this way, the performances of the two biggies — SBI and ICICI Bank — are not encouraging. “Just in one quarter, the larger banks have shown a phenomenal rise in their net NPAs. Though this is largely due to the increased exposure to smaller corporates, it drives home the point that it is not just right to classify the performances of public and private sector banks,” says the Ask Raymond James analyst.

While that is debatable, public sector banks are increasingly leveraging their brand equity to take on competitors.

“It is just a matter of time before public sector banks catch up with their private sector counterparts even in terms of growth,” says an analyst from a foreign brokerage.