|HOME | BUSINESS | COMMENTARY | HARSHAD MEHTA|
|August 26, 1997||
Newer banks have a better chance of surviving
Some months ago, I picked the banking industry as one that would gradually outperform the broad market. It is five months since that column, and I am now beginning to be proven right. The Bank of India stock has appreciated from its initial public offering level of Rs 45 to Rs 62 recently, the Bank of Baroda counter has surprised many an analyst by moving from Rs 85 to Rs 170, while HDFC Bank has simply taken one's breath away: the company posted an earning per share of Rs 2.0 for 1996-97 and the stock touched a 52-week high of Rs 76, resulting in a p/e of 38. Encouraged by this success on the secondary market, ICICI Bank dared to issue stock to investors at a retrospective p/e of above 30 which would have been unthinkable for a number of merchant bankers midwifing the issue a few months ago.
My faith in the banking industry comes from some plain conclusions. One, the government has turned on a few selective knobs within the economy which should turn the broad industrial indices around a few months from now. Once this happens, the growth in banking will happen automatically. Two, the credit reserve ratio cuts over the last year-and-a-half have been perhaps the biggest in the modern history of Indian banking, leaving a much bigger float with banks with which to expand their business. Three, with interest rates coming down, there is an appreciation in the value of the bonds held in the statutory liquidity ratio portfolios of some of these banks.
Besides, the losses of the past -- in a rising interest rate scenario -- which necessitated higher provisions to be made, will now be replaced by gains from bonds when these are sold in the market. As a result, the depressed bottomlines of the past could rebound strongly over the coming years.
Four, historically bank deposits as a percentage of the GDP was 73 per cent in Thailand and 78 per cent in Malaysia in the early nineties; in 1996, my estimate is that the figure in India was around 43 per cent only. Even at today's levels, there is a lot of catching up to do. Five, if the Indian GDP grows at 6.5 per cent over the next five years and attracts foreign direct investment of around $ 50 billion, the growth in the banking sector could be to the extent of Rs 5,000 billion -- more than what the power or telecom industries are going to see. My argument is that the stock markets in the country have not discounted this into the current pricing of the industry. When it wakes up to the dynamite of potential within, the discounting graph will strengthen in a hurry.
The rise in the level of the water will, however, not raise all ships. The archaic banks functioning just the way they did in the sixties will stay put; the quicker ones will grow at their expense. The quicker ones are going to be those with a low salaries bill, those with a strong computerised network, those who are going to be quick in their response time to customers, those who are going to provide increasing value to their clients, those who are going to provide services and solutions that banks did not offer before, those who go to where the customers are instead of the other way around and those who treat their walk-in clients like their benefactors instead of treating them like insects standing in a queue.
The newer banks in the private sector stand a better chance in adapting to the increased demands. This is becoming increasingly evident in the way the banking industry is growing: There are 65,000 public sector branches in the country compared with 160 new private sector branches. The latter holds a three per cent market share. That is not the important number. The compelling statistic is that of the incremental market, the new private sector branches have a market share of 14 per cent.
Anyone intending to take a position on India's banking industry needs to look only this far. With the private sector banks, one has few options. IndusInd and UTI Bank are unlisted. HDFC Bank is one which is quoted at a p/e which is in line with the p/e enjoyed by respectable banks the world over, reflecting solidity, credibility and growth. You can look at ICICI Bank if you are sure that it will not be merged into ICICI and if there substantial growth coming up in the next two years which can justify this fancy discounting.
That, after a process of elimination, leaves us with Global Trust Bank. There are a number of things that I like about GTB:
Two reasons make GTB interesting from a stockpicker's point of view. The bank has earned around Rs 1.11 billion of profits in two-and-a-half years' working -- on an equity of Rs 1.04 billion. Not many banks -- or companies -- are capable of this at the start of their business existence. As a result, the return on average net worth has increased from 28 per cent to 32 per cent to 35.5 per cent. Dividend received for the original allottee has been Rs 3.70 per share over the period.
Deposits at GTB are expected to increase from Rs 23 billion (as on 31 March, 1997) to Rs 32 billion towards the end of the current year. I expect that the bottomline, post provisions, is likely to increase from Rs 570 million to around Rs 770 million in the current year. Earnings per share is expected to be around Rs 7.50. In 1998-99, the profits are expected to rise to Rs 1.1 million (EPS Rs 10-plus).
The play is likely to be in the discounting. HDFC Bank is priced in excess of a p/e of 30; with higher profits and a lower equity, if GTB can get a discounting of even 15, you should see the stock double from the current levels in anticipation of the bottomline for 1997-98. Thereafter, even higher.
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