Opinion

Picking the right banks for privatisation

S Kalyanasundaram | Updated on April 09, 2021

Market cap, PE ratio and capital adequacy are some factors that can be used to zero in on sell-off candidates

As part of the Budget speech, the Finance Minister had announced that the government budgeted ₹1.75-lakh crore from stake sale in public sector companies and financial institutions and this includes two PSU banks. The Chief Economic Adviser has said that the IPO of LIC of India may garner ₹1-lakh crore and the BPCL privatisation may bring in ₹75,000-80,000 crore.

Though the name of the banks to be privatised have not been revealed, the two banks may be from the recommendation some months ago by the NITI Aayog for privatisation of three PSBs — Bank of Maharashtra, Indian Overseas Bank, and Punjab and Sind Bank.

When bank employees went on a two-day strike last month, the Finance Minister had said that the decision to privatise banks was a well-thought one and the government wanted the banks to get more equity and to meet the aspirations of the country. She further said that the government would ensure protection of the rights and perquisites of the PSB staff, and that all earlier commitments made would be honoured. So, the government is determined to go ahead.

Later on it was reported that the NITI Aayog kept public sector banks that were part of the last round of consolidation and State Bank of India out of the privatisation plan. This means that six banks — Bank of Maharashtra, Indian Overseas Bank, Central Bank of India, Bank of India, Punjab and Sind Bank and UCO Bank — can be eligible for privatisation.

As the government has not announced the names of the two banks that are to be privatised, there is speculation over the possible candidates.

The decision to select the banks for privatisation can be based on the following criteria.

 

 

Price to book value

As these banks’ shares are quoted in the market, the market price of the share gives an indication on how the bank is rated in the market. As the government’s aim should be to get maximum realisation for its assets, a higher Price to Book Value ratio, may fetch better realisation. The PB Ratio of these banks are as follows: 1.6 (IOB), 1.4 (BoM), 0.6 (BoI and UCO Bank) and 0.2 (P&SB)

Price-earnings ratio

The PE ratio also gives an indication of how the market values these banks. When the banks are offered for privatisation, the bidder may offer better price than price under the present PE ratio.

The PE ratio of these banks shares are as follows: UCO Bank with 104.6, IOB with 42.2, BoM with 30.1, P&S with minus 0.4, CBI with Minus 7.7 and BoI with Minus 14.3.

Market capitalisation

One of the reasons for the government to privatise the banks is to reach the target of stake sale and to manage the fiscal position. So, the banks which can provide maximum funds by privatisation can be a vital criteria to decide the candidate. Market cap of these banks are as follows — IOB: ₹26,381 crore, BoI: ₹22,845 crore, BoM: ₹13,710 crore, UCO Bank: ₹10,860 crore, CBI: ₹9,577 crore and P&SB: ₹1,132 crore.

Capital adequacy ratio

Another reason for privatising banks is to get away from the responsibility of providing further capital to these banks to meet CAR norms. That way the CAR of banks can be another important criteria to decide the candidates for privatisation. The CAR of BoM, P&SB, BOI, CBI, UCO and IOB are 13.65, 13.40, 12.80, 12.39, 11.80 and 11.49, respectively.

Method of privatisation

The government may sell the banks to an existing private bank by calling for bids. In such a scenario, the offer may be better for banks with branches which can be rationalised after merger. This may provide more business to the acquirer bank with fewer branches. The staff strength can also be a criteria that may decide the bidding price as the new entity has to take over the staff also with all the existing service conditions. We have to wait and see the government’s decision on the selection of banks that are to be privatised. Indian Overseas Bank has the highest market cap, highest PB ratio, Lowest CAR and second highest PE Ratio. Is it the best bet for privatisation?

The writer is a retired banker

Published on April 09, 2021

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