Mumbai: With shares of four public-sector banks trading at a discount to their book value and several others at book value, some bank CEOs have begun lobbying the government to buy back the cheap shares and offer them as employee stock options (Esops).
“This is the best way to retain talent,” says the CEO of a public-sector bank who didn’t want to be named. “Since we are not able to pay them (the employees) market-related salaries, the government can seriously consider the buy-back option... and reward the employees.”
But the pleas aren’t falling on receptive ears at the finance ministry. “First, we must accept the employee stock-option concept,” says a ministry official. Another finance ministry source says the idea of buying back shares when they are trading cheap is theoretically fine, but there has to be a budgetary provision for this.
However, he admits that there is unlikely to be any political opposition to this idea since, through the buyback, the government can raise its stake. So far, political opposition has been to lowering government stake in banks. The government’s share in listed public-sector banks now ranges between 51.09% (in Oriental Bank of Commerce) and 80% (Bank of India). Under existing law, it cannot go below 51%.
The book value is arrived at by dividing a bank’s net worth, that is share capital and reserves, with the number of shares.
“Typically, for banks, one should take into account their non-performing assets and adjust the book value accordingly. It’s true that most of the banks have been making provisions, and their net non-performing assets are also coming down, hence, the adjusted book value will not make any radical difference. But the fact that their market price to book value is sharply coming down does not augur well for the banking sector,” says a chartered accountant with a large private bank.
A senior banking analyst with a foreign brokerage house in Mumbai says the market is sensing that banks’ non-performing assets may go up in their over-aggressiveness to build retail assets. He also feels that their profitability will be hit on account of depreciation of their government-bond portfolio, following the rise in interest rates.
At least four public-sector banks are currently trading at below their book value.
At its closing stock price on 21 March, Oriental Bank of Commerce’s price to book value was 0.86 times; that of Dena Bank, 0.87 times; IDBI, 0.89 times, and Uco Bank, 0.91 times. Bank of Baroda’s book value is just about one time its market price.
Despite the current low levels, the price to book value has actually improved substantially this week after bank stocks started rising on the bourses. The Bombay Stock Exchange’s banking stock index, Bankex, rose 6% even as the benchmark index, the Sensex, rose 1.89%.
For instance, as late as 16 March, most public-sector banks had prices that were less than book value.
In contrast, the price to book value of Indian private banks is much higher.
For instance, Kotak Mahindra Bank’s price to book value is 16.12 times. The price to book value of ICICI Bank, India’s largest private bank, is 3.51 times, while HDFC Bank’s price to book value is 5.76 times. Among others, UTI Bank is now trading at a price to book value of 4.7 times, Yes Bank, 5.57 times, and Centurion BoP, 4.6 times.
“The higher the price to book value of a bank, the more expensive it is. Typically, an Indian public sector bank trades at a price to book value of two times or slightly less. The scene is very different now. Only a couple of them are trading at a price to book value of higher than 1.5 times,” says a senior executive of a global consulting firm.
Globally, Citibank’s price to book value is more than two times and HSBC and some of the Chinese banks, too, have more than two times price to book value, while the Bank of America, Credit Agricole and a few other large banks trade at slightly below two times their price to book value.
State Bank of India, the country’s largest commercial bank, accounting for about a fifth of total banking assets in India, is now trading at a price to book value of 1.87 times. In terms of market capitalization, however, it is the second-largest bank at Rs51,690.56 crore, way behind ICICI Bank at Rs77,859.77 crore.
Collectively, 16 listed public-sector banks and IDBI have a market capitalization of more than Rs83,000 crore. In this pack, only one bank, Punjab National Bank, has more than Rs10,000 crore market capitalization. Its market capitalization on 21 March was Rs14,235.80 crore, more than 80% higher than its nearest rival, Bank of Baroda (Rs7,853.81 crore).
Ashwin Ramarathinam contributed to this story.