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Business News/ Opinion / Bank stocks bought on personality cult in India
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Bank stocks bought on personality cult in India

Bank stocks bought on personality cult in India

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How is (R.P.) Singh? As aggressive as (K.C.) Chakrabarty?" I came across these queries from institutional investors in the past few weeks.

Alok Misra, who was till recently heading the Delhi-based Oriental Bank of Commerce, shifted to Mumbai in August as chairman and managing director of another large public sector bank, Bank of India. Singh, former chief of Delhi-based Punjab and Sind Bank is set to become the head of Punjab National Bank, India’s second largest public sector lender, behind only State Bank of India.

K.R. Kamath, who runs the Kolkata-based Allahabad Bank, was ahead in the race for the top job at Punjab National Bank till recently, but it seems Singh has overtaken him in the last lap. A career bureaucrat, Singh has relatively longer experience of running a bank than Kamath even though unlike Allahabad Bank, Punjab and Sind Bank is not a listed entity.

Also Read Tamal Bandyopadhyay’s earlier columns

About 10 public sector bank CEOs, including M.S. Sundararajan of Indian Bank, S. Bhat of Indian Overseas Bank and Satish Gupta of United Bank of India, will retire next year.

In most Indian private banks, the succession plan is meticulously crafted, but the selection of a new CEO for a public sector bank is a very different process. Should the chairman of a small bank be chosen to head a relatively bigger bank or should the executive director of a bank be promoted when the top slot falls vacant? Except for the fact that one needs to have at least two years of service left to be considered for the top job, there are no ground rules.

The government’s appointments panel, consisting of a Reserve Bank of India deputy governor, a finance ministry bureaucrat, and a few experts, decides on who becomes the chairman of which bank. When the executive directors of banks become chairmen, they need to appear before the panel, but when one CEO moves from one bank to another, there is no interview.

Apart from the employees, the other set of people who are always curious to know who will be next boss in a bank are the institutional investors who buy bank stocks. Unlike manufacturing firms, where quarterly earnings and balance sheets give the investors a peek into firms’ fundamentals, the Indian banking industry is largely driven by the personality cult when it comes to whetting investors’ appetite. The personality cult works for all banks, but it is more pronounced for the government-owned ones.

Theoretically, all such banks are board driven, but the finance ministry often plays the role of a super board and a “weak" CEO is always susceptible to government pressures. The person may be a delight for the government’s welfare schemes, but no good news for the investors as over-indulgence in such activities hurts a bank’s profitability.

There are three kinds of bank CEOs. The first set is very articulate and they always do their homework before addressing the investors, prepared with facts and figures. Then, there are CEOs who are passionate about what they do and use histrionics to influence investors. Finally, there are others who are neither articulate nor do they resort to histrionics while selling their banks. They are not necessarily bad bankers but bad marketing professionals.

Indeed, analysts in brokerages closely follow financials of banks and their balance sheets. They look at their NIM (net interest margin) and CASA (current and savings accounts—the more the CASA, the less the cost of funds) and other ratios such as return on assets and return on equity and so on, but bank CEOs play a major role in influencing their investment decisions. So, after Chanda Kochhar took over as CEO and MD of ICICI Bank Ltd, India’s second largest lender, its stock has risen faster than the Bankex, the Bombay Stock Exchange’s banking index, and the exchange’s bellwether equity index, the Sensex. Ditto at Axis Bank Ltd, after Shikha Sharma took over the reins. The traditional wisdom has been that once a CEO becomes a media darling, it’s time to sell the stock of the firm.

The other influencing factor for the investors is the movement of the government’s bond yields. A recent study of Nobel Group, a UK investment bank, based on government bond yields and bank stock prices between March 2003 and March 2009, showed the price of bank stocks and government bond yields moved in the opposite direction. In other words, when bond yields rises, bank stocks go down. This is because the bulk of the earnings of most Indian banks comes from bond trading. When bond yields rise and prices go down, banks get hurt as their income goes down and on top of that, they need to provide for a depreciation in their bond portfolios. Traditionally, bank stocks are a play on the economy. When the economy is on a firm growth path, bank stocks rise on the assumption that their interest income will go up substantially with companies and individuals accessing higher bank credit. But in India the banks are a play on the government bond cycle. This is because at least one-fourth of banking assets here are government bonds and rising interest rates wreak havoc on their portfolios.

Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email your comments to bankerstrust@livemint.com

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Published: 20 Sep 2009, 09:55 PM IST
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