Midsize Public Sector Banks Survive Downturn

2008-09 and the ongoing 2009-10 have not been easy years for the country’s mid to small sized public sector banks. Yet they have shown remarkable resilience in fighting back the downturn with all available tools at their disposal.

Good examples of this trend have been Bank of India and Central Bank of India on the big side, and Indian Overseas Bank and UCO Bank on the smaller side.

These tools include profit from treasury operations, profit from wholesale banking, cutting cost of deposits, and managing NPA levels.

Using these tools, as well as growth in their core banking business, Mumbai headquartered Central Bank of India’s net profit rose from Rs. 96.15 crore a year ago to Rs. 313.93 crore. The bank could better its treasury operations, as well as its wholesale and retail banking operations.

At another Mumbai headquartered major, Bank of India, the core metric of net interest income (NII) increased by 3.37% to Rs. 1409 crore. But BoI opted for higher provisioning for its NPAs this quarter, which pulled down its net. But since then, the new RBI directive of 70% Provision Coverage Ratio (PCR) has made the bank look wise among its peers.

Chennai based Indian Overseas Bank (IOB) could have posted an operating profit of Rs. 554.6 crore, but the exceptional case of the absorption of the loss making Shree Suvarna Sahakari Bank dragged down its net profit to Rs. 176.04 crore. IOB was handpicked by the Government earlier to save SSSB.

However, Kolkata based UCO Bank had a smoother sail this quarter. Net profit was up by 38.4% on strong growth in interest as well as treasury income. The bank is rapidly shedding its high cost bulk deposits, and managing its NPA levels quite well. Total income grew over 19%, while operating profit was up by around 50%. Now the bank is working hard to increase the competitive metric of net interest margin (NIM) to 2.15% from the current 1.88%.

SBT: Of Keralites, By Keralites, But Not For Keralites?

State Bank of Travancore is Kerala’s official bank if there is any such designation. It was created by eminent Keralites, and still thrives on Kerala’s huge NRI and domestic deposits. But when it comes to loans, SBT prefers to help corporates outside the state, often through big-ticket loan syndications. Ditto is the case with the bank’s customer service – winning accolades outside the state, and drawing flak inside Kerala. Is it something wrong with State Bank of Travancore or something wrong with Keralites? Are they expecting too much from their own bank?

Kerala headquartered SBT is not only a worthy child of the State Bank family. It is also a worthy adult with a mind of its own. Mergers are not something for State Bank of Travancore, which has taken into its fold not less than 10 banks during its 64 years of existence.

But this time, things would be different, no doubt, as it would be SBT which would be taken in by its parent since 1960, State Bank of India. But that merger is still far off, as SBI has prioritized the takeover of smaller, unlisted, and less healthy group banks than State Bank of Travancore like State Bank of Indore, State Bank of Hyderabad, and State Bank of Patiala.

SBT on the other hand is a listed entity, and has the unique credentials of never failing to make a profit and never failing to deliver dividends in its history.

But FY 2008-09 and the present year should be exceptions, anyone will agree. But at SBT, there is no need for such exceptions. For 2008-09, State Bank of Travancore registered a rise in net profit of 57.43% and a dividend payout of 130%. It was a record, and it clearly showed the bank team and its leadership could effectively rise up to the challenges.

And in 2009-10, this momentum only continues to gather steam with SBT posting a 337% rise in Q1 YoY.

SBT’s Managing Director AK Jagannathan is a veteran of the State Bank Group, having worked in State Bank of Mysore, State Bank of Hyderabad, & State Bank of Patiala, before taking up the assignment of Chief General Manager of State Bank of Travancore in October 2008 and later as its Managing Director. He is the perfect complimentary partner to SBI’s & State Bank Group’s Chairman OP Bhatt. Incidentally, Bhatt was the MD of SBT before moving to SBI in 2006.

State Bank of Travancore is known for its support for sensitive sectors, and was recently noted for surpassing its targets in delivering loans to farmers. At the same time, it caters to the diverse needs of its modern customer base. Recetly SBT tied up with Sundaram BNP Paribas to deliver their mutual funds through SBT branches.

State Bank of Travancore is a full service bank complete with core banking, internet banking, mobile banking, ATMs, home loans, vehicle loans, multi-city cheques, online tickets / bill payments, 3-in-one savings / demat / trading accounts, e-Tax, microfinance, MSME financing, reverse mortgages, and international credit / debit cards.

Owing to its presence in Kerala, SBT also has one of the most extensive NRI and Forex services in the country.

Midsize Public Sector Banks Fight Downturn

2008-09 and the ongoing 2009-10 have not been easy years for the country’s mid to small sized public sector banks. Yet they have shown remarkable resilience in fighting back the downturn with all available tools at their disposal.

Good examples of this trend have been Bank of India and Central Bank of India on the big side, and Indian Overseas Bank and UCO Bank on the smaller side.

These tools include profit from treasury operations, profit from wholesale banking, cutting cost of deposits, and managing NPA levels.

Using these tools, as well as growth in their core banking business, Mumbai headquartered Central Bank of India’s net profit rose from Rs. 96.15 crore a year ago to Rs. 313.93 crore. The bank could better its treasury operations, as well as its wholesale and retail banking operations.

At another Mumbai headquartered major, Bank of India, the core metric of net interest income (NII) increased by 3.37% to Rs. 1409 crore. But BoI opted for higher provisioning for its NPAs this quarter, which pulled down its net. But since then, the new RBI directive of 70% PCR has made the bank look wise among its peers.

Chennai based Indian Overseas Bank (IOB) could have posted an operating profit of Rs. 554.6 crore, but the exceptional case of the absorption of the loss making Shree Suvrana Sahakari Bank dragged down its net profit to Rs. 176.04 crore. IOB was handpicked by the Government earlier to save SSSB.

However, Kolkata based UCO Bank had a smoother sail this quarter. Net profit was up by 38.4% on strong growth in interest as well as treasury income. The bank is rapidly shedding its high cost bulk deposits, and managing its NPA levels quite well. Total income grew over 19%, while operating profit was up by around 50%. Now the bank is working hard to increase the competitive metric of net interest margin (NIM) to 2.15% from the current 1.88%.

How LIC Remains Life Insurance Leader: 10 Strategies

LIC was not self-made. It was chosen from among many, more than 50 years back. Chosen to be made the only operator in life insurance. But the acid test came in 1999. The sector was deregularized, with multiple private operators entering the sector. Most predicted a la BSNL for LIC, if not an untimely demise. But Life Insurance Corporation of India has emphatically proven that it has a long long life ahead. The private life insurers are yet to do a la Airtel or la RCom. A more honest statement would be that they are unable to do it. Unable to even figure out how to stop the LIC express. And then comes the double whammy for them – the worldwide financial meltdown. When even giants like AIG reeled, LIC found opportunity in distress. Their November 2008 launch, Jeevan Aastha, a close ended single premium plan went on to become a smash hit, with a record breaking first premium collection of Rs. 10,000 crore within 45 days. From its long-back status of the chosen insurer, LIC has become the choice insurer. What is powering the LIC juggernaut? Seasonal Magazine identifies 10 of LIC’s winning strategies:

LIC EDGE 1:
Focus on Core Business

In an ever changing business and investment environment, where the temptations for losing one’s way have been numerous for a financial company, it stands to LIC’s credit that it has never lost its focus on its core business – insuring lives. This has ensured LIC’s edge against competing investment platforms like recurring deposits, mutual funds, or equities. Because the pitch is, an LIC policy does all that, but it also insures life.

LIC EDGE 2:
People Power

There is no doubt that people power continues to be LIC’s trump card. Even in 2008-09, LIC registered a 12.66% growth in its formidable army of agents, which now stands more than 13.44 lakh. Even while comparable financial organizations like SBI struggle to have a performance linked pay structure in place, this is a human resource pool that works entirely on performance status. LIC’s Post Recruitment Orientation Training (PROT) is reputed to make top performers from average sellers. It also goes to LIC’s credit that it didn’t opt for VRS or retrenchment for its salaried employee base, instead making them productive through HRD initiatives.

LIC EDGE 3:
Claim Performance

LIC continues to be the most believable life insurer around, based on actual claim performance. During 2008-09, LIC settled over 1.49 crore claims, with 97% maturity claims settled on or before date, and 93% of non early death claims settled within 20 days of intimation. Outstanding claims under death is 2.21% and that under maturity is just 0.26%.

LIC EDGE 4:
Technology Edge

Post de-regularization, LIC had moved swiftly to implement the latest paradigms in the area of IT implementation, so that the new agile competitors don’t have an advantage over it. Lately, LIC has started setting the standards in IT implementation, and its new EDMS project all set to be completed shortly, it will be LIC who is going to enjoy a huge edge due to technology.

LIC EDGE 5:
Alternate Channels

It was once thought that alternate channels like bancassurance would sound the death-bell for LIC. Instead the company quickly adapted to the possibilities of the bancassurance model, and today has tie-ups with 34 banks on corporate agency model, and with 57 banks on referral model. And wonder of wonders, LIC’s alternate channels business is growing at a blistering pace of 32% annually.

LIC EDGE 6:
Rural Reach

Instead of waiting for the urban markets to get more and more saturated, LIC early on diversified its attention to rural markets, and with excellent results. LIC continuously recruits and develops special rural agents, and the insurer has opened a lot of satellite office in rural areas. The recently launched Jeevan Mangal and the repositioned New Jana Raksha plan have been quick hits with farmers and rural people.

LIC EDGE 7:
Widest Portfolio

LIC has more than 50 different plans catering to the different needs of different segments of the society. LIC also has 13 Pension and Group Schemes. Whatever be the need, LIC has a suitable policy to match that need. From conventional plans like endowment assurance, and money back plans to the contemporary unit-linked plans to serve a wider category of customers, LIC offers Unit-Linked Health Insurance Plan, Term Insurance plans, Plans for Women, Pension Plans, and a wide range of children's plans, too.

LIC EDGE 8:
Investment Business

LIC continues to be the country’s largest investor. Even in a difficult financial year like the present, LIC has pumped in more than Rs. 1,00,000 crore of investments, of which over Rs. 22,000 crore is into the capital markets. LIC’s profits from equity this year is fast approaching Rs. 5000 crore, but it remains a net buyer. LIC is also powering the nation’s infrastructure, corporate debt, and government securities. Apart from profits, this gives the organization a lot of leverage with the Government, corporates, and the various funds.

LIC EDGE 9:
Sensing Dangers Ahead

LIC’s response to the Swaroop Committee has been quite rational. The organization reiterated that insurance continues to be a sold product and not a bought one, and as such the agents should not be meted out a bad deal.

LIC EDGE 10:
Credible Ownership

Needless to say, LIC ownership continues to be a major competitive advantage. The 100% ownership by the government makes it risk proof and in the present economic climate, it is a huge advantage recognized by the customers.

Why SBI Gets No RBI Waiver on NPAs, PCR

Does India's central bank, Reserve Bank of India, believe that nobody is too big to fail?

Post Lehman, post Merrill Lynch, & post RBS, the biggest joke doing the rounds in banking circles has been nobody is too big to fail. Because, whenever some wise mind tried to point out the risky games these giant banks played, the stock reply was, “Nah! Too big to fail”.

Now it seems that this newfound cautionary syndrome has caught up in India. The country’s central bank, RBI, often noted for its excellent and dynamic banking regulations has now come up with a stunner – all banks have to set aside funds to cover 70% of the total worth of bad loans. Technically called Provision Coverage Ratio (PCR) for Non Performing Assets (NPA), this has earlier been anything between 10-100%, with the average being 51%.

But some banks like, the country’s biggest – State Bank of India – always had a problem with this line of reasoning. Until recently, their PCR has been just 38.72%, and only on RBI prodding a couple of months back that it was hiked to the present 45.1%.

But Reserve Bank of India is still not impressed. There is no waiver even for the country’s largest bank that controls nearly one-fourth of Indian banking. SBI’s profitability is going to be hit, as the bank will have to set aside Rs. 3800 crore from their profits.

State Bank of India Chairman OP Bhatt has always maintained that his bank’s PCR is small due to the better quality of their NPAs. But conservative peers like Punjab National Bank (PNB) have set aside 90% and HDFC Bank has set 68%.

Anyway, why is Reserve Bank of India so adamant about 70% PCR? One reason might be the Indian banks’ aggressive new initiative to woo millions of home-loan seekers with an ascending interest rate pattern. SBI had pioneered this scheme, and received wide applause for it.

But this kind of loans where the interest burden starts light and gets heavier over the loan-term is said to be a major contributor to the subprime home-loan crisis in US.

Just imagine a couple in their 40s, taking a Rs. 40 lakh home loan in 2009. For the first four years, everything goes fine, and after that the higher interest regime sets in, just-in-time when their other burdens like children’s higher education / marriage sets in, and their employability and earning capacity decreases.

Is RBI foreseeing this scenario in India?

Can Public Make Money From the Coming IPOs?

First, a small quiz. Here is a recent corporate quote. You have to identify who said the following recently:

“As and when I find the market is favourable and I can get good money, I will go for IPOs & FPOs.”

You need not strain. Here are the choices:

A) Anil Ambani B) Gautam S Adani C) Subrata Roy Sahara D) Vijay Mallya E) None of the above.

Since you are smart, you would have zeroed in on Choice E, but should still be hard-pressed to identify who else in the India would match the audacious ambition of the Ambanis, Adanis, Saharas, or the Mallyas.

Beaten? Wait, here are further clues about this Chairman & Managing Director. He presides over a giant diversified conglomerate of 242 companies. He is into oil, he is into power, he is into telecom, he is into infrastructure, he is into insurance, he is into banking, he is into every sector worth placing a bet.

Still beaten? Well, many of you would have guessed by this time, but for those who couldn’t, I am sorry, the marks go to the quiz master.

His name is Pranab Mukherjee. That quote above was by him, as reported by at least a couple of top rung newspapers. Well, not exactly. Instead of “IPOs & FPOs”, he had used the word “disinvestment”. But that would have been a giveaway.

Still, we prefer to believe that Pranab Kumar Mukherjee never spoke these words.

But there is no denying the fact that the clout of the PSUs and its Boss are both on a steady rise.

Today, around 40% of GDP growth comes from PSUs, and while the private sector continues to languish in the financial downturn, the PSUs have collectively achieved more than 20% annual growth. Interestingly, this has resulted in mutual fund companies now making a beeline for launching funds that invest only in PSU equities. Two huge attractions of PSUs as felt by the stock market investors are their monopoly nature and their extremely low debt equity ratio, making them the safest growth opportunities.

During the past several years, huge makeovers and reinventions have been happening in several of the 240 odd Central PSUs. Professional CEOs have been roped in from the private sector, and in some cases, even from abroad. A few turnaround specialists have also turned up from the IAS cadre.

Heavy Engineering Corporation (HEC), Projects & Development India Ltd (PDIL), WAPCOS (formerly, Water & Power Consultancy Services), Bharat Pumps and Compressors Limited (BPCL), EDCIL (formerly, Educational Consultants India Limited), Hospital Services Consultancy Corporation (HSCC) etc are some of the remarkable public sector turnarounds in recent years.

As an aside, it would be interesting to find out who is the real boss of PSUs - the office of the Prime Minister or the office of the Finance Minister. Whoever it is, the point is simple - the modest abandons power, while the assertive usurps it.

Anyway, Dr. Singh and Mukherjee are out to collect a record sum by disinvestment that will be more than what the previous governments have collected in the last two decades. This year alone the collection will be to the tune of Rs. 20,000 crore from top performing PSUs like NTPC, SJVN, NMDC, SAIL, REC etc.

Coming back to the Mukherjee quote, what is wrong with it? Isn’t this what all of us wanted – a public sector that is as ambitious and agile as our private sector?

Well, there is a huge difference. Reliance and ONGC are in the same industry, both are public limited companies, but there is this huge difference. SBI and ICICI Bank are in the same business, both are public, but again there is this discomforting difference.

It can be argued that both sectors run on public money – investors, IPOs, secondary markets etc all apply to both – but companies like RIL & ICICI are always private companies. Call its public investors private investors if you like. They are there by choice.

But is it the same with truly public companies like ONGC or SBI? Forget their private investors, but what about us? The taxpayers? Is our money there by choice? Do you personally believe in recapitalizing Andhra Bank with your money or ONGC drilling that next hole in Iran with your money? Probably not. But you don’t have much choice.

It is easy to confuse things between public and private using stock market lingo. But this is a country where the number of retail equity investors hasn’t reached that high figure - 1% - of the population, still. Agreed, NSDL & CDSL has 1.6 crore demats, but on one end there are significant duplicates, and on the other end a lot of empty accounts.

It is not the same as the taxpayer base. Again, there is a riddle. Only 3% of the population pay personal tax in this country. And only 11% of the listed companies pay tax. But that is just the income tax or corporate tax. What about the numerous other taxes, levies, & surcharges that we pay whenever we buy, sell, travel, invest, redeem, or avail a service? PSUs are able to shine only on capital from these kinds of accruals.

But the media projections are often the opposite. We hear of Bank Chairmen paying hefty dividend cheques to the Government, and organizations providing more than 5% of India’s GDP. SBI has even stood guarantor to the Indian Government once. One can only pity the intelligence of that lender, whoever it is, to believe in the soundness of SBI more than the soundness of India.

But what is the real story behind these PSUs? Many giant PSUs are still 100% owned by the Government and almost 60% of SBI’s ownership is still with the Government. Substitute the word ‘Government’ with the word ‘Indians’ and read that again. Because in one way or other, all Indians are taxpayers too.

That is why whenever anyone in the Government speaks of disinvestment, they should pause and think about whose investment they are disinvesting and to whom? It is the public’s money, and it should go to the public too. If that is not entirely possible due to market constraints and to encourage foreign investments, at least make sure that the public gets a fair pie at discounted prices.

The concept is akin to the cry for issuing equity shares to people whose land is acquired for developmental projects. How good it would have been for Tata, West Bengal, and the people there, if all concerned had heeded to such a call.

Anyway, with some of the biggest IPOs like BSNL & LIC yet to happen, and numerous Nava Ratnas and Mini Ratnas still capable of powerful FPOs, the best opportunity for the true owners – the public – is yet to come.

Governments and Ministers are just custodians of this wealth.

And here is an interesting afterthought. Last month, Minister of State for Finance SS Palanimanickam claimed in Rajya Sabha to have collated a 100-company list that together owe the exchequer an unbelievable 1,41,000 crore in tax dues. While the list is dominated by private sector giants like Coca Cola, Tata Motors, & Sahara India, we don’t have a clue why this list also includes several public sector companies like SBI & IOC. The evaded figure is interesting, as it is the double the guesstimated sum stashed away in Swiss banks, and more than thrice what India spends on NREGA.

ICICI Bank's Real Turnaround Still Away?

There is nothing more sacrosanct than quarterly results. It separates the listed from the unlisted entities, the men from boys. Because, the latest quarterly results increases or decreases that revered number – TTM EPS – or trailing twelve months’ earnings per share, the ultimate metric that shows the investors what they are getting for their investment.

Take for example ICICI Bank. For the quarter ended September 2009, ICICI has come up with impressive numbers. Operating profit was up 18% QoQ and 6%YoY, net profit was up 2.6%, net interest margin (NIM) was maintained at 2.5%, net NPA was down 6.2%, and CASA deposit percentage was up to 36.9% from 28.7%.

On the whole it comes out as solid results. Even the stock markets reacted favourably, for a couple of days. Chanda Kochhar even began hoping for a bonus for her hardworking team this year. In 2008-09, they had missed their bonus, while at the end of 2007-08, then CEO & MD KV Kamath had been paid Rs. 43.24 lakh, while Kochhar reportedly was paid Rs. 22.44 lakh.

But a look at the quarter with more realistic glasses, yields a different set of results. Total income fell 12.7%, fee income declined 26%, loans contracted 14% YoY, net interest income was down 5% YoY, and ratio of net NPAs to loan assets rose from 1.9% to 2.36%.

More interesting are the positive numbers of net profit and CASA deposits. Headline profit was up mainly on a huge relative growth in treasury income, compared with Q2 of 2008-09. Then treasury was at a loss of Rs. 153 crore, while this time it posted a profit of Rs. 297 crore. And the real reason why CASA percentage rose was this – its total deposit base shrunk by 11.45%.

Not that ICICI Bank did any jugglery on these numbers. Anyone in their position would highlight the good figures and downplay the bad ones. But what matters is the way different media has opted to cover the numbers.

There was a core message in the real numbers of ICICI Bank, and it was this – the planned turnaround hasn’t started delivering in their core businesses.

Even worse is the impact the new provision control ratio (PCR) will have on ICICI Bank’s bottomline. The estimated Rs. 1800 crore extra provisioning required by the bank to meet the 70% PCR can wipe out around 35% of its current annual profits, some reports say.

ICICI Bank’s is not a lone case as far as confusing quarterly results is concerned. The media and the markets want to project the good side of friends. But the fact that, in India, quarterly results are still unaudited should be another cause for concern. Because of this, developed markets have started looking at EPS with suspicion, and instead looking only at Cash EPS, and the corresponding P/C, instead of P/E.

Not that Cash EPS can’t be tampered. It is difficult and would take a concerted Satyam like effort.