India Banks - small but yet big

ICICI Bank Ltd’s CEO and managing director K.V. Kamath is the happiest man in the Indian financial sector today. The bank’s just concluded twin Rs20,125 crore (about $5 billion) follow-on equity offer has mopped up around Rs1.5 trillion (about $37 billion). In some ways, this is reminiscent of the initial public offer (IPO) of the Industrial and Commercial Bank of China (ICBC), China’s largest lender. In October 2006, ICBC went for a dual-listing in Hong Kong and Shanghai to raise $21 billion, making it the world’s biggest IPO, beating the record of Japan’s NTT Mobile Communications Network Inc. that had raised $18.4 billion in 1998.
The euphoria over ICICI Bank’s public issue is indeed comparable with what Chinese banks have created among the global investing community. But, the comparison ends here. ICBC’s market capitalization is over $212 billion, 10 times bigger than that of ICICI Bank. India’s second largest lender has a market cap of Rs85,774 crore or above $21 billion at last Friday’s closing price. ICICI Bank has priced its domestic issue at Rs940, marginally lower than its closing price on Friday. If it manages to hold on to this price till the new shares are listed, its market cap will probably cross $25 billion.

ICBC’s market cap is more than double the market cap of all listed Indian banks which is just above $90 billion (Rs3.7 trillion). State Bank of India, the country’s largest commercial bank and double the size of ICICI Bank in terms of assets, has a market cap of close to $19 billion (Rs76,619 crore). It is followed by HDFC Bank with a market cap of $8.65 billion (Rs35,188 crore). Only three other Indian banks have over $4 billion market cap, namely Kotak Mahindra Bank ($4.93 billion) and UTI Bank ($4.27 billion) in the private sector and Punjab National Bank ($4 billion) in the public sector.

Indian banks are indeed pygmies both in terms of market cap as well as their asset base. ICBC has an asset base of over $750 billion—three-fourths the size of the Indian economy and much higher than the asset base of the entire Indian banking industry. State Bank of India’s total asset base is around $137 billion, ICICI Bank’s is roughly half of this size.

Based on 2006 balance sheet numbers, State Bank is about one-tenth the size of the world’s biggest bank, Citigroup, on the basis of Tier I capital (net worth and free reserves). On the basis of Tier I capital, State Bank’s global position was 72 last year. It is not even at the forefront of Asian banks where the first three slots were occupied by the Chinese banks. Six Chinese banks featured among the top 25 Asian banks last year, India had only two—State Bank and ICICI Bank.

Three banks each from the US and Japan, two from the UK and one each from France and Spain completed the global top 10 list. In the pack of Asian banks (excluding Japan), China accounted for five of the top 10 slots, Australia four and South Korea one.

Indian banks are nowhere near the global giants in terms of scale. But if one goes beyond the scale in terms of assets and market capitalization and focuses on other parameters such as price-to-book-value (P/BV) and price earnings (P-E) multiple, one would see immense value in these banks. This explains the mad rush for ICICI Bank’s equity issue.

Based on 2006-07 balance sheets, at least four Indian private sector banks have P/BV over five times. Kotak Mahindra Bank tops the list with 12.28 times P/BV, followed by Yes Bank (5.61 times), HDFC Bank ( 5.47 times) and UTI Bank (5.12 times). Development Credit Bank and Centurion Bank of Punjab have over 4 times P/BV while ICICI Bank’s P/BV before its equity dilution is 3.53 times. State Bank of India’s P/BV is 2.47 times and that of Punjab National Bank (PNB) 1.61 times.

The average price to book value of public sector banks at around 1.6 times is less than that of their private sector counterparts but overall the Indian banking industry is in sync with its global peers. ICBC’s price to book value is about 2.5 times. Most US banks trade in the range of 1.2-3.5 times and the range for the European banks is 2-3 times P/BV.

In terms of price earnings multiple, the Chinese banks are in the range of 16-24 times. The average P-E of listed Indian banks is around 15 times with Kotak Mahindra topping the list. HDFC Bank is trading at a P-E of 31.88 times and ICICI Bank, before the listing of new shares, at 29.87 times. In the public sector, both SBI as well as Industrial Development Bank of India are trading at a P-E of over 17 times while PNB and Bank of India are trading at a P-E of over 10 times.

Once, Kamath had said that he would like to see ICICI Bank’s market cap topping $100 billion. It may sound a wild dream today but is very much in the realm of possibility. Chinese banks are not known for transparency. Last year audit firm Ernst & Young estimated that China’s bad loans were over $911 billion and the big four Chinese banks accounted for one-third of that. But, despite the huge non-performing assets and weak disclosures, the international community sees huge potential in China’s banking sector. Indian banks, with much lower distressed assets and better disclosure norms, can ride India’s economic growth equally well. But their real value will be unlocked only when they build scale.