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Public sector banks (PSBs) have fared better than their private sector
counterparts in terms of return on equity (RoE) in the last two financial years,
breaking with the trend seen over at least six previous years, says a report by
Avendus Equity Research.

The trend may be here to stay, Chandana Jha, banking analyst, Avendus
Equity Research, suggests in the report, released last week.

RoE measures a bank’s profitability by revealing how much profit it has

generated with the money shareholders have invested.

India’s second-largest lender, ICICI Bank, had the lowest average RoE of
9.2% in the March 2008-March 2010 period, while Punjab National Bank
(PNB) had the highest, at 24%.

The figures are likely to be maintained in the March 2011-March 2013 period,
with ICICI Bank’s average RoE at 10% and PNB’s at 24.1%, says Jha. “Due
to lower equity dilution, most PSBs have either sustained or increased their
RoE during the past decade.

This is in contrast to the decline in RoE for new banks, which was partly
driven by frequent capital raising. Despite the lead in loan growth over PSBs,
the RoEs of new banks may not diverge and may stay below that of a few
PSBs during March 2011-March 2013,” Jha writes.

For state-owned lenders, the RoE performance has largely been a result of
improving profitability.“Our profitability has improved over the years and that
helped us to maintain higher RoE. We hope to maintain this going forward,”
said M D Mallya, chairman and managing director, Bank of Baroda.

Another reason is that Tier-I capital, which is the core measure of a bank’s
financial strength from the regulator’s point of view, has been kept lower than
for private sector banks. This has helped them achieve higher leverage.
“The profits of peer banks remain the same. If they have more equity than us,
then the RoE can get depressed. In our case, the Tier-I capital is 8.47%,
whereas the private peers have much more. The leverage is slightly higher in
our case,” said B A Prabhakar, executive director, Bank of India.

Financial Daily
from THE HINDU group of publications
Saturday, November 24, 2001
Are public sector banks inefficient?
P.R. Brahmananda

THE Reserve Bank of India has just published its statutory

report on Trend and Progress of Banking in India -- 2000-01.
The year saw disturbing developments, especially in the co-
operative banking world. Further, some of the old ideas of
linking banks wi th the mutual fund business do not seem to
have taken off in the measure expected. There have also been
controversies about whether banks should involve themselves
even indirectly in the stock market.

The banks have been forced to reduce their interest rates on

loans and deposits, but the effects of such policy on improving
credit offtake from banks has clearly not been satisfactory.
The so-called reluctance to borrow is more due to the
phenomenon of credit deadlock rather than of `high' interest
rates. The Trend and Progress Report does not touch on all
these issues. But, it does give enough statistical information
about the overall progress of banking and related sectors.
Public sector banks own 79 .5 per cent of total assets of all
commercial banks but earn 67.2per cent of aggregate net
profits. The older private sector banks have 6.5 per cent of
total assets and earn 8.1 per cent of aggregate net profits. But
the new private sector banks have a s hare of 6.1 per cent in
total assets and 10 per cent of the aggregate net profits.
Foreign banks have a share of 7.9 per cent in total assets but
enjoy a 14.7 per cent share in aggregate net profits. Clearly,
the public sector banks are not able to obtai n a proportionate
share in net profits in relation to their share in the assets. But
the foreign banks with a share of less than 10 per cent in
aggregate assets appropriate more than 20 per cent of the
aggregate net profits. The private sector banks with a 14 per
cent share in assets obtain a 24 per cent share in the
aggregate net profits. What do the above figures imply?

Note that income other than interest income forms a ratio of

about 13.8 per cent to the interest income in the case of public
sector banks. For foreign banks, the ratio is about 26.5 per
cent. In the case of private sector banks as a whole, it is about
1 4.5 per cent. Non-interest income would consist of
transactions concerning brokerage, foreign exchange, etc.
There is no doubt that a significant advantage in earning net
profits arises because of the differential market access of
foreign banks vis-`-vis Indian banks in non-interest income
business in India. The ratio of net profits to aggregate
expenditure is about 4.4 per cent for public sector banks. In
the case of foreign banks it is 8.6per cent and for the private
sector banks about 7.5per cent. Bu t if we take operating
profit, the public sector banks have a ratio of about 13.9 per
cent to expenditure; foreign banks about 28 per cent, and the
private sector banks about 26.7 per cent.

If we take operating expenses as a proportion of income, it is

about 27 per cent in the case of public sector banks. For
foreign banks, it is not very different, at about 26 per cent. In
the case of the private sector banks, it is about 18.2 per cent.
It seems the potential surplus out of income in the case of the
private sector banks is substantially higher than that for
foreign banks and public sector banks.

Wage bill constitutes about 75 per cent of the operating

expenses of public sector banks; 42 per cent for private sector
banks, but only about 32per cent for the foreign banks.

The spread ratio — that is the ratio of net interest income to

assets — is 2.84 per cent in the case of public sector banks,
2.51 per cent for old private sector banks, 2.14 per cent for
new private sector banks, but 3.64 per cent in the case of
foreign banks. Net interest income and net other income,
income through non-deposit-credit transactions through the
banks, constitute theoretically the broad surplus before wages
and other cost expenditures. The foreign banks are very well
off in thi s respect. That is why the spread is so high in their
case.

In the case of foreign banks with a spread of 3.64 per cent as

a ratio to assets, the wage bill share is just 0.97 per cent of
assets. For public sector banks, with a spread of 2.84 per cent,
the wage bill share is as high as 2.03 per cent of assets. In the
case of old private sector banks, with a spread of 2.51 per
cent as a ratio of assets, the wage bill is 1.23 per cent, again
as a ratio of assets. In the case of new private sector banks,
the low spread ratio of 2.14 per cent is juxtaposed with an eq
ually low ratio of wage bill of 0.32 per cent to assets.

It seems the comparative disadvantages of public sector banks

are two-fold. The ratio of non-interest income to interest
income is lower in their case compared to other categories of
banks. Second, the ratio of wage bill to assets is substantially
higher in their case compared to the other categories of banks.
What is most interesting is that the wage bill advantage is
more in the case of private sector banks even vis-`-vis with
respect to foreign banks.

If we treat wage-costs as a parameter to individual banks, the

primary low viability of the public sector banks comes from a
reason exogenous to them. It is the high wage costs, both
absolutely and relatively, that are pulling down these banks.
Such high wage costs are due both to excess staffing,
relatively higher wage levels due to powerful trade union
pressures and to lower measures of mechanisation and
computerisation in their case. These reasons are largely
historical in character because of forces that no bank
management would have been in a position to control; not
even the RBI could have. In distant time, the impact of these
forces will get reduced and from the mathematical angle, the
public sector banks can emerge over the long run with the sa
me measure of efficiency as the other sets of banks.

The RBI should take some interest in equipping the different

banks, especially those in the public sector, with strong
departments of economic research. The model should be that
of the US' Federal Reserve. Each public sector bank is
sufficiently large to have a research establishment of its own
with its own research journal. It is understandable that top
bank officials like to move up in the management hierarchy
category. This is not a healthy trend.

The economists in banks should move up in the country's

specialist professional class of economists. Management jobs
are peripheral to the specialisation in economics. One hopes
RBI reports will touch also on the overall research output of
different bank s in terms of their internal economic research
departments.

Management positions involve power. But scholars need not

pursue power as an end. This has been the bane of economists
in this country. Things must change if the country has to
emerge in professional expertise on a par with the US.
Public Sector Banks Outshine Pvt.
Players Amidst Slowdown: ASSOCHAM
Written by DARE   
Sunday, 01 February 2009 00:00
According to ASSOCHAM, all key indicators suggest that Public Sector banks (PSBs)
maintained their supremacy over private banks in recent times despite pressures of
global meltdown, these not only succeeded in lowering lending rates with maintaining
record growth of net profits but also drastically reduced their non-performing assets
(NPAs) as compared to private banks.
The findings are from a ASSOCHAM Financial Pulse (AFP) Study on “Performance
Analysis of Indian Banking Sector”, which tracked quarterly results of 25 national banks,
(15 public and 10 private sector banks and show that PSBs have recorded impressive
performance across all significants of banking parameters.
While these reduced their prime lending rates by 75- 125 basis points; higher than the 50
- 75 basis points cut made by private banks, their credit growth has far surpassed the
latter at 28.6 per cent as compared to meager 11.8 per cent growth registered by private
banks.
The public sector banks have emerged strong across all key indicators as the global
financial turmoil and slowing domestic economy put the banking sector on a test. The
public banks have not only reduced the lending rates but have also managed to record
higher average net profit and lower NPA level than their private sector counterparts,
reveals an AFP Study.
Despite lower lending rates, the net interest income growth of the PSBs was much higher
at 50 per cent as against 32 per cent growth witnessed by private banks which fuelled the
bottom line growth of public banks. The net profit of public banks jumped by 57 per cent
as compared to 44 per cent rise in the bottom line of the private banks.
Progressing on bringing a significant shift in their conventional image, the public sector
banks have considerably improved their quality of assets. The rise in Net NPAs of the
private banks was far higher at 44 per cent than the public sector banks at 29 per cent.
“In divergence to the turmoil in the global banking institutions; Indian banking sector
stands tall with stupendous growth in profits, however rise in NPAs may remain a key
challenge”, said Shri D. S. Rawat, Secretary General, ASSOCHAM.
The AFP Study also revealed that even if the banking sector is among the front runners
in terms of growth in net profit during the third quarter of the fiscal, the quality of bank
assets deteriorated significantly with an average 34.46 per cent rise in net non performing
assets (NNPAs) accompanied by a marginal slippage in average capital adequacy ratio
(CAR) to 13.22 per cent in Q3 FY‘09 from 13.39 per cent in the corresponding period last
year.
The aggregate net non-performing assets (NPA) of 25 banks increased to Rs 19,899.47
crore in Q3 FY’ 09 from Rs 15,962.58 crore in the corresponding period last year.
During September - December 2008, the Reserve Bank slashed its key lending rate, the
repo, by 250 basis points as an indication to the commercial banks to soften their interest
rates. However, the banks acted reluctantly to transfer the benefit by reducing their
benchmark Prime Lending Rate (PLR) aggressively, according to the ASSOCHAM Study.
Third Quarter Banking Sector Performance Analysis
  Q3 Average Growth ra

Sector No. of Banks Net Profit Net Interest Net NPA

Income

Public 15 57.29 49.98 28.83

Private 10 43.88 32.08 43.84

Source: ASSOCHAM Research Bureau

Source: ASSOCHAM