Indian Banking Industry - PSU and Private

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

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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.