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
--
CA Ramachandran Mahadevan,M.Com.,F.C.A.,
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