Indian Banking Industry - PSU and Private

[Akhilesh_Halageri]

This is very surprising to see considering the number of frauds in the financial industry this past decade.
Source: tickertape.in

[KB0707]

[manishdhariwal]

There is a case for investing in the PSU Banks as their balance sheets are becoming clean and they are considerably cheaper than the Pvt Banks. Bank of Baroda (BB) and Canara Bank (CB) are two, that are amongst the country’s premier PSU Banks after SBI. Syndicate Bank was merged with Canara Bank, while Dena and Vijaya Bank were merged with Bank of Baroda.

While a good rise in their stock prices has already been seen, the investment case still looks promising given the improvement in growth visibility, reduction in the Covid related risk and a clear demonstration of improvement in business metrics by the above two banks. Valuations also give a comfort, despite the rise

The attempt here’s to undertake a comparison of these two similar sized banks

Amounts in Rs Crs	CB	BB
9 Mths	Dec-21	Dec-21
Total Interest Earned	51,549	51,707
Total Interest Expense	32,171	27,698
Net Interest Income	19,378	24,009
Other Income	12,035	8,962
Total Income (NII + Other Y)	31,414	32,971
Employee Cost	9,476	9,276
Other administrative Exps	5,050	6,941
Total Operating Expenses	14,526	16,218
Cost To Income Ratio	46.24%	49.19%
Profit before Tax and Provisions	16,887	16,753
Provisions and contingencies	9,064	9,266
Exceptional item	1,355	-
PBT	6,468	7,488
Income Tax	2,456	1,994
Tax Rate	37.97%	26.63%
PAT	4,012	5,494

While BB has higher NII, CB has reported higher other income. However, upon diving into the breakup, we find there is a significant “Others” in CB, which we don’t know

Amounts in Rs Crs	CB	BB
9 Mths	Dec-21	Dec-21
Fee Based Income	4,221	4,562
Trading Income	2,070	2,592
Recovery in Written off a/cs	1,954	1,594
Others	3,790	214
Total Other Income	12,035	8,962

From the composition of the PBT we find that Corporate/Wholesale banking for BB has become profitable compared to CB. As against Retail making a chunk of BB profits, treasury profits comprise a significant portion of CB’s profits. However, BB has a huge Rs 4261 Crs of unallocated cost which hides the actual segment profitability. To note CB doesn’t have any unallocated cost

Amounts in Rs Crs	CB	BB
9 Mths	Dec-21	Dec-21
Treasury	6,486	3,619
Wholesale Banking	-4,135	1,802
Retail Banking	4,117	5,979
Other Banking		349
Total	6,468	11,749
Unallocated Cost		4,261
PBT	6,468	7,488

On the Balance sheet BB has lower equity, a plus. CB is also higher leveraged at present compared to BB

Amounts in Rs Crs	CB	BB
9 Mths	Dec-21	Dec-21
Share Capital	1,814	1,036
Net Worth	48,102	61,161
Asset Size	11,94,727	11,97,054
Deposits	10,43,351	9,78,034
Advances	6,92,167	7,32,164

Looking at the key ratios we find that BB scores better on most of the parameters

Amounts in Rs Crs	CB	BB
9 Mths	Dec-21	Dec-21
Net Interest Margin (%)	2.79%	3.13%
CASA Ratio	34.60%	44.28%
Return on Assets	0.45%	0.62%
Cost To Income Ratio	45.85%	49.03%
% of Gross NPAs	7.80%	7.25%
% of Net NPAs	2.86%	2.25%

Market also seems to be valuing BB better than CB

Valuation Ratios on 7 February 2022	CB	BB
P / BV	0.75	0.71
PE	7.42	11.49

At P/BV of 0.75 there is an upside visible if the current scenario continues. Initial rise in the benchmark interest rates will also augur well for the banks as it will improve the NIM.

[Chumantar]

[Chumantar]

[Chumantar]

[Vinayaka123]

Came across this video explanation regarding banking and nbfc sector.

As a beginner, I find it very helpful to learn different aspects of the industry and what drives the valuations, risks etc.

I follow him for NBFC & Banks| How to find Multibaggers in this sector!

If you find it helpful, do search his name on YouTube there’s another video which is 2 years old, even though there is a lot of overlap, there are different bits of insights in that one with omkara capital