BANKING AND FINANCIAL SERVICES PSU BANK

Executive Summary:
In recent times, the banking and financial industries have gone through
drastic changes and there is a lot of focus on risk and controls of every product /
service offered. The banks have cut down on the non-core products and started
focussing on what is important for that geography rather than offering multiple
solutions / products. Even the global banks which everyone thought its too big
to fail had cut down the number of operations / products across countries. There
are instances where they had completely exited markets which are not really
part of their growth strategy. The 2008 crisis, really helped the financials across
the world to look at things differently and prune their balance sheet.
Despite the challenges and amidst all chaos, the Indian banking sector has
been amongst a few to maintain resilience. Financial inclusion drives, gradual
growth of balance sheet and focus on NPA reduction have contributed to making
Indian banking vibrant and strong. Especially the PSUs were really able to react
to the situation much faster than anticipated. The way forward for the thriving
and vibrant banking system is to develop a proper financial structure and to
innovate to take advantage of new business opportunities through proper risk
assessment.
India has the potential to become the 3rd largest banking and financial
industry according to KPMG-CII report. The current worth of Indian banking
industry is Rs.81 trillion and banks are now focussing on internet and mobile
services for servicing the customers and facilitate transactions. The Indian
banking industry consists of 26 PSUs, 20 private banks along with 43 foreign
banks. This does not include cooperative and rural banks. In the recent past
-2012, there is an amendment to the banking laws which allows RBI to issue
licenses to new bank. This new initiative could help to bring a structured financial
product and better inclusion. This could also help to monitor the cash flow of
each individual and could reduce the liquidity issues of the bank through
consistent cash flow.
Challenges faced in Banking:
There are various challenges faced by the banking industry due to credit
quality, priority sector lending, competition among the peers, skilled staffs,
liquidity, inclusion, growing NPAs, technology and information security. This
clearly sends the message that not too many players but with consolidation of
banks, we should be able to reach out to maximum people by focussing more on
technology and the operational challenges. There have not been many mergers
in the banking industry even if we have expanded the operations across urban
and rural markets. Since 2000, there have been few mergers which have really
helped the industry but this could become better by consolidating the banks
(PSU / private banks). In a recent interview, a foreign bank CEO has pointed out
that India does need more banks but at the same time needs bigger banks too
with more specialization. Big PSUs such as the State Bank group, PNB, and
Canara bank could play a crucial role in creating bigger banks by consolidating
the balance sheets.
Recently, Kotak Mahindra bank had taken over ING Vysya bank for
Rs.15000 crores which could take the balance of Kotak Mahindra to Rs.2 lakh

crores and its market cap will be over Rs.1 lakh crore. In a recent survey of Indian
consumers conducted by Reputation Institute (USA), there are 4 PSU banks which
are among top 200 i.e. SBI, PNB, BOB and Canara Bank.
For this discussion, we have considered the 3 major banks SBI group, PNB
and BOB. We would discuss their financial statement summaries and the key
ratios to conclude whether we can invest in their stocks.
State Bank of India:
Incorporated in the year 1955, it is a large cap company with the current market
value of ((Market value * Number of shares) = (317 * 74)) Rs. 23500 crores
operating in banking sector. We have taken the consolidated balance sheet of SBI
to arrive at different ratios as well as to determine the company performance.
(source: money control.com Consolidated Balance Sheet)
The bank is facing challenges in terms of NPAs which stand at 5% of advances
given. We could see a clear progress in terms of provision made towards NPA.
The provision for the year 2014 has come down to Rs.7000 crores from 22,599
crores. We could also see a progress in the non-interest income but it is
compensated against the expenses incurred towards salary. There is an increase
in interest income towards the advances and the expenses for the year 2014.
This clearly indicates that the bank is working towards bringing in funds through
CASA / term deposits. The Asset Liquidity management seems to be better than
last year along with credit quality.
Earnings per Share = Profit After Tax / No. of Shareholders = 14173 / 74 = Rs.192
Price Earnings Multiple = Current Market Price / Earnings per Share = 317 / 192
= 1.65 times
Return on Equity = PAT / Shareholders funds = Profit after tax / Networth =14173
/ 147370 = 9.7%