Investing: Don't Bank on them
November 03, 2011 06:59 PM |
R Balakrishnan
Why investors should stay away from government-controlled banks
If I own 100% of a company, it is completely my prerogative to do what I please with it. However, the moment I invite someone else to become a part owner, I lose the right to do anything that does not enhance shareholder value (in other words, there is no right to do any act which results in the shareholder suffering a loss in value). We have our government-controlled banks, where the main shareholder/promoter continuously and consistently destroys value. Right from appointment of a chief executive to forced lending to sectors from which there is no hope of recovery, the main shareholder has been abusing the rights of other shareholders who have foolishly piled on board. I call them `foolish', because their expectation that the government will get out of the business, is a long way off from coming true.
Of course, investors and brokers chant that, ultimately, privatisation will happen. So, buy it today in anticipation of freedom tomorrow. My thoughts are the opposite. Let freedom happen first. Then we can decide. No one really knows the health of government-controlled banks. Each time there is a problem, the Reserve Bank of India (RBI) bails them out by changing the accounting standards.
Investments can be conveniently categorised under nebulous heads called `Hold to Maturity', `Available for Sale', etc. If there is a valuation problem, it is simply re-labelled. Norms for recognition of bad debts keep changing. Loan rescheduling is common. Banks, like SBI (State Bank of India), do not recognise pension liability; instead they account for it as and when paid!
Our wonderful members of the Institute of Chartered Accountants of India (ICAI) sign the balance sheets of banks without any riders/pre-qualifications! Their job is to comment if there is a deviation from generally-accepted accounting practices. They cannot keep quiet if there is a deviation and not comment simply because the RBI permits it. The auditors are appointed to opine whether the books are true to reality and in conformity with accounting standards. The rules of the RBI are merely a labelling exercise for the banks. RBI thinks that by changing the name of the disease, the state of health is changed! I am also amazed at how a bank like SBI, with its few thousand branches, gets audited at all. And, to top it, SBI has a list of auditors, most of whom are not known (whether they have the size and skill-sets to audit a bank is another question), who come together and one auditor signs everything! The audit process at SBI should surely be amazing.
We all know that SBI owns a few subsidiaries. From the schedules to SBI's balance sheet, I can neither make out the number of shares that SBI holds or the value/cost of its investments in different subsidiaries. Banks do not give a list of the investments they hold. Apart from the SLR (statutory liquidity ratio) investments, banks have a lot of investments that are lumped together in one line. So, how does an analyst make sense of it at all?
Automation and technology have made visits to the banks redundant. In this, private sector banks have clearly taken the lead and they have also learnt to do what it takes to keep the affluent customer happy. Private banks have dedicated relationship managers who are there to help you out with virtually anything to do with your account. Many private banks also send people to your home/office if the relationship is commercially significant.
Here is where a bank like SBI has no hope. It will be left with poor un-remunerative customers in the big cities. The cream of the affluent is unlikely to give the Bank a look unless there are compelling circumstances. Of course, the fact that the government of India uses SBI as its main bank enables SBI to be the largest bank, without any effort or a business strategy. All government companies, state and Central treasuries keep SBI in the pink of health by keeping large balances in the current account. This is evidenced by the high CASA (current account and savings account) balances (that carry zero to low interest as opposed to fixed deposits) of nearly 50% of accounts that SBI holds. (It also shows that government companies and government departments have no freedom and are forced to keep money idle and enrich SBI). The private sector does not keep money idle. It keeps money in liquid funds, even if the surplus cash is for a couple of days at a time. In fact, `treasury income' constitutes a large part of a company's revenue. So, here we have an inefficient government machinery feeding the inefficient banks. In addition, SBI is always at the forefront of politically-inspired financial giveaways, which no self-respecting private sector bank would do. Any bank which has issued shares to the public has no right to give away anything for free. We always see that SBI is the first to be used when it comes to loan waivers or opening of branches at unviable locations.
The interesting development will be merger of the subsidiary banks. Logically, one would expect a huge amount of cost savings, reduction in headcount as well as selling of surplus real estate. It has not happened yet and, given that SBI is a bank that even has a union of `officers', it is unlikely to materialise. So, the large `hidden' values are not going to be unlocked at all. The Bank continues as inefficiently as ever. It is only because of freebies in the form of high CASA, assured government business, etc, that the return on equity, or RoE (the only measure for efficient utilisation of shareholder money) is in double digits, though it is far below the RoE of large and efficient private banks.
The other thing that I look at is the `executive' pay at government-controlled banks. If someone is good, why should he work for such a pay? Is he driven by a sense of public service? It is time that the remuneration for senior executives was brought on par with those in the private sector. In the absence of parity, I am afraid, only incompetent people or the corrupt will run a bank. This factor is compounded by the presence of unions (including `unions for officers'—the management team!) which will not allow one officer to jump ahead of another. I have worked in nationalised banks and have friends who still work in them. There is a set of people that works hard but cannot make any decisions. There is another set of people that shirks work and doesn't care about anything and the management of the bank cannot do anything about them. Then there are some who line their own pockets by selling out to businessmen, who see corruption as an easy way out. Of course, the chairman is subject to all kinds of political pressures in lending decisions.
None of the government-controlled banks has a long-term strategy for business and the chairman generally gets appointed at the fag end of his career. If he is honest, he is worried about his pension and will play it safe. If he is corrupt, he will go berserk and lend to all kinds of sectors. He simply will not be allowed to execute a 10-year plan. In short, is it worth investing in the shares of these government-controlled banks, simply in the hope that some day, they will be unshackled?
The author can be reached at balakrishnanr@gmail.com
November 03, 2011 06:59 PM |
R Balakrishnan
Why investors should stay away from government-controlled banks
If I own 100% of a company, it is completely my prerogative to do what I please with it. However, the moment I invite someone else to become a part owner, I lose the right to do anything that does not enhance shareholder value (in other words, there is no right to do any act which results in the shareholder suffering a loss in value). We have our government-controlled banks, where the main shareholder/promoter continuously and consistently destroys value. Right from appointment of a chief executive to forced lending to sectors from which there is no hope of recovery, the main shareholder has been abusing the rights of other shareholders who have foolishly piled on board. I call them `foolish', because their expectation that the government will get out of the business, is a long way off from coming true.
Of course, investors and brokers chant that, ultimately, privatisation will happen. So, buy it today in anticipation of freedom tomorrow. My thoughts are the opposite. Let freedom happen first. Then we can decide. No one really knows the health of government-controlled banks. Each time there is a problem, the Reserve Bank of India (RBI) bails them out by changing the accounting standards.
Investments can be conveniently categorised under nebulous heads called `Hold to Maturity', `Available for Sale', etc. If there is a valuation problem, it is simply re-labelled. Norms for recognition of bad debts keep changing. Loan rescheduling is common. Banks, like SBI (State Bank of India), do not recognise pension liability; instead they account for it as and when paid!
Our wonderful members of the Institute of Chartered Accountants of India (ICAI) sign the balance sheets of banks without any riders/pre-qualifications! Their job is to comment if there is a deviation from generally-accepted accounting practices. They cannot keep quiet if there is a deviation and not comment simply because the RBI permits it. The auditors are appointed to opine whether the books are true to reality and in conformity with accounting standards. The rules of the RBI are merely a labelling exercise for the banks. RBI thinks that by changing the name of the disease, the state of health is changed! I am also amazed at how a bank like SBI, with its few thousand branches, gets audited at all. And, to top it, SBI has a list of auditors, most of whom are not known (whether they have the size and skill-sets to audit a bank is another question), who come together and one auditor signs everything! The audit process at SBI should surely be amazing.
We all know that SBI owns a few subsidiaries. From the schedules to SBI's balance sheet, I can neither make out the number of shares that SBI holds or the value/cost of its investments in different subsidiaries. Banks do not give a list of the investments they hold. Apart from the SLR (statutory liquidity ratio) investments, banks have a lot of investments that are lumped together in one line. So, how does an analyst make sense of it at all?
Automation and technology have made visits to the banks redundant. In this, private sector banks have clearly taken the lead and they have also learnt to do what it takes to keep the affluent customer happy. Private banks have dedicated relationship managers who are there to help you out with virtually anything to do with your account. Many private banks also send people to your home/office if the relationship is commercially significant.
Here is where a bank like SBI has no hope. It will be left with poor un-remunerative customers in the big cities. The cream of the affluent is unlikely to give the Bank a look unless there are compelling circumstances. Of course, the fact that the government of India uses SBI as its main bank enables SBI to be the largest bank, without any effort or a business strategy. All government companies, state and Central treasuries keep SBI in the pink of health by keeping large balances in the current account. This is evidenced by the high CASA (current account and savings account) balances (that carry zero to low interest as opposed to fixed deposits) of nearly 50% of accounts that SBI holds. (It also shows that government companies and government departments have no freedom and are forced to keep money idle and enrich SBI). The private sector does not keep money idle. It keeps money in liquid funds, even if the surplus cash is for a couple of days at a time. In fact, `treasury income' constitutes a large part of a company's revenue. So, here we have an inefficient government machinery feeding the inefficient banks. In addition, SBI is always at the forefront of politically-inspired financial giveaways, which no self-respecting private sector bank would do. Any bank which has issued shares to the public has no right to give away anything for free. We always see that SBI is the first to be used when it comes to loan waivers or opening of branches at unviable locations.
The interesting development will be merger of the subsidiary banks. Logically, one would expect a huge amount of cost savings, reduction in headcount as well as selling of surplus real estate. It has not happened yet and, given that SBI is a bank that even has a union of `officers', it is unlikely to materialise. So, the large `hidden' values are not going to be unlocked at all. The Bank continues as inefficiently as ever. It is only because of freebies in the form of high CASA, assured government business, etc, that the return on equity, or RoE (the only measure for efficient utilisation of shareholder money) is in double digits, though it is far below the RoE of large and efficient private banks.
The other thing that I look at is the `executive' pay at government-controlled banks. If someone is good, why should he work for such a pay? Is he driven by a sense of public service? It is time that the remuneration for senior executives was brought on par with those in the private sector. In the absence of parity, I am afraid, only incompetent people or the corrupt will run a bank. This factor is compounded by the presence of unions (including `unions for officers'—the management team!) which will not allow one officer to jump ahead of another. I have worked in nationalised banks and have friends who still work in them. There is a set of people that works hard but cannot make any decisions. There is another set of people that shirks work and doesn't care about anything and the management of the bank cannot do anything about them. Then there are some who line their own pockets by selling out to businessmen, who see corruption as an easy way out. Of course, the chairman is subject to all kinds of political pressures in lending decisions.
None of the government-controlled banks has a long-term strategy for business and the chairman generally gets appointed at the fag end of his career. If he is honest, he is worried about his pension and will play it safe. If he is corrupt, he will go berserk and lend to all kinds of sectors. He simply will not be allowed to execute a 10-year plan. In short, is it worth investing in the shares of these government-controlled banks, simply in the hope that some day, they will be unshackled?
The author can be reached at balakrishnanr@gmail.com
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