A highly agitated CEO of a small, private sector Indian bank expressed his “extreme disappointment” with this column.
Last week, I had argued why smaller Indian banks should merge with their relatively large peers to build the scale. The CEO, who wants to remain unidentified, does not agree with this argument. He says the financial sector should be democratic and small, efficient players should co-exist with the large ones. “We must continue to have small banks in various pockets to cater to the local needs,” he said. “Poor villagers do not have the access to big banks with global scale.” That the concept of local area banks has miserably failed and large public and private banks are now aggressively expanding in rural India didn’t cut much?ice with him.
So, let’s take a look at how efficient are our banks vis-à-vis their global peers. The Bankers’ World 1000 Bank list cites three important efficiency parameters: return on assets (RoA), return on average capital, and the cost-income ratio.
State Bank of India Ltd (SBI), which is the world’s 70th bank when ranked on the basis of its Tier I capital (equity and reserves) and 80th on the basis of assets, had an RoA of 1.29% last year. That puts SBI at the 455th slot on the ladder. ICICI Bank Ltd, India’s second largest bank and the second Indian bank in the world’s first 200 banks in terms of core capital as well as assets, is positioned 476 with an RoA of 1.23%. Among other large Indian banks, Punjab National Bank (PNB) stands 420 (RoA of 1.40%), Bank of Baroda (BoB) at 482 (1.21%), Canara Bank at 568 (1.01%) and Bank of India (BoI) at 665 (0.82%).
Are the mid-sized and small Indian banks better off?
HDFC Bank Ltd, one of the most expensive banks in Asia in terms of price to book value, had an RoA of 1.8% last year, also putting it at 270 in the world on this parameter. Corporation Bank last year had an RoA of 1.66% and Oriental Bank of Commerce (OBC) 1.41%. Corporation Bank does not figure in the list of first 300 banks and OBC is beyond 400.
Bank of America Corp. (BoA), which tops the list of 1,000 banks on the strength of its Tier I capital, last year had an RoA of 2.19%, making it 188th bank in this category. The Moscow-based Natsionainyy Reservnyy Bank, which is 441 in terms of core capital and 983 based on assets, has the best RoA—39.61%. The bank that has second-best RoA is even smaller: African Bank ( 21.92%). Based on assets, it is only the world’s 993 ranked bank and when it comes to Tier I capital, its position is 714.
SBI’s profit on average capital is 26.1% and ICICI Bank’s is 21%. Comparative figures for PNB are 23.2%, Canara Bank 22.9%, BoI 22% and BoB 20.9%. In this category, SBI is positioned 270 and BoB 419. HDFC Bank’s profit?on average capital is 28.7%. Relatively smaller banks, such as Corporation Bank and OBC, are also lagging behind others. Corporation Bank’s profit on average capital is 20.4% and OBC’s is 21.4%.
BoA’s profit on average capital is 38.7% and UBS, which is the world’s biggest bank in terms of assets, posts 36.5% profit on average capital. Their respective positions in this category are 69 and 83. Wintrust Financial Corp. of US, smaller than most of the Indian public sector and new private banks, tops the list with 157.4% profit on average capital. The second slot goes to Bank of Alexandria of Egypt with 128% profit on average capital. The Cairo-based bank is even smaller and does not figure among the first 800 banks based on equity and reserves.
Finally, let’s take a look at the cost-income ratio of Indian banks. To arrive at this ratio, other income such as fee-based income and treasury profits are added to net interest income (interest earnings minus interest expenses) and this is compared with the cost incurred on employees, infrastructure, technology and so on.
SBI’s cost-income ratio is 58.15%, PNB 51.26%, BoB 51%, Canara Bank 46.83% and BoI 55.41%. The cost-income ratio of ICICI Bank is not available. Among other banks, HDFC Bank has a cost-income ratio of 46.30%, OBC 44.76%, Corporation Bank 41.61% and Union Bank of India 46.76%.
While Bank of America’s cost-income ratio is 48.75%, UBS has a cost-income ratio of 69.77%. The cost-income ratio of Citigroup is 58.05% and HSBC Holdings 51.33%. Industrial and Commercial Bank of China has, however, a much lower cost-income ratio of 36.30% while Bank of China’s cost-income ratio is 46.32%.
The Indian banks are indeed comparable with their global peers as far as cost-income ratio is concerned and some of them are even better than larger global banks. However, there is a crucial difference between Indian banks and their global counterparts in terms of composition of the cost-income ratio. For Indian banks, particularly the public banks that account for three-fourth of the industry, staff cost is about 70% of their total cost. Globally that’s not the case.
The only way to reduce this is to cut the fat. Most public banks are hugely overstaffed. Besides, many overaged employees lack the skill of modern banking. At least 100,000 public bank employees had left their jobs early this century responding to the industry’s first-ever golden handshake scheme. Another round of voluntary retirement will help the industry cut down employee cost. The money saved can be used for building the right technology platform to reach out to un-banked rural India at a lower transaction cost. Once banks build the volume of business, even small loans will become profitable. So, scale and efficiency are interlinked. Indian banks can be both big and efficient at the same time.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai Bureau Chief of Mint. Email comments to email@example.com