Of SBI and other PSU's

(This is from the latest issue of Moneylife. Was written before the downgrade of SBI ) If I own one hundred percent of a company, it is completely my prerogative to what I please with the company I own. However, the moment I invite someone else to become a part owner, then I have no right to do anything that does not enhance shareholder value (in other words, there is no right to do any act which results in the shareholder suffering a loss in value). We have our PSU Banks, where the main shareholder / promoter continuously and consistently destroy value. Right from appointment of a CEO to forced lending money to sectors from which there is no hope of recovery, the main shareholder has been abusing the other shareholders who have foolishly piled on board. I call them foolish, because their expectation that the government will get out of business, is a long way from happening. Of course, investors and brokers say that ultimately privatisation will happen. So, buy it today in anticipation of freedom tomorrow. My thoughts are the opposite. Let freedom happen. Then we can take a call. No one really knows the health of the PSU banks. Each time there is a problem, the RBI bails them out by changing the accounting standards. Investments are categorised in to nebulous buckets called “Hold to Maturity”, “Available for Sale” etc., If there is a valuation problem, it is simply re-labelled. Norms for recognition of bad debts keep changing. Loan re-scheduling is common. Banks like SBI do not recognise pension liability, and instead account for it as and when paid! And our wonderful members of the Institute of Chartered Accountants sign the balance sheets of banks without any qualifications! Their job is to make a comment if there is divergence with generally accepted accounting practices. They cannot keep quiet if there is a deviation and not comment simply because the RBI permits it. The auditors have been appointed to opine if the books are true and in conformity with accounting standards. The rules of the RBI are merely a labelling exercise for the banks. Our RBI thinks that by changing the name of the disease, the state of health is changed! I am also amazed at how a bank like SBI with its few thousands of branches gets audited at all. And to top it all, SBI has a list of auditors, most of whom are not known (whether they have the size and skill sets to audit a bank is another question) who come together and one auditor signs everything! The audit process at SBI should surely be amazing. We all know that SBI owns a few subsidiaries. From the schedule, I can neither make out the number of shares that SBI holds or the value/cost of its investments in different subsidiaries. Banks do not give a list of the investments they hold. Apart from the SLR investments, the banks have a lot of investments that are lumped together in one line. So, how does an analyst make sense of it at all? Automation and technology have made visits to the banks redundant. In this, the private sector banks have clearly taken the lead and they have also learnt to do what it takes to keep the affluent customer happy. Private Banks have dedicated relationship managers, who are there to help you out with virtually anything to do with your account. Many private banks also help out by sending people to your home / office if the relationship is commercially significant. Here is where a bank like State Bank of India has no hope. It will be left with the poor un-remunerative customers in the big cities. The cream of the affluent are unlikely to give the bank a look see unless there are compelling circumstances. Of course, the fact that the government of India uses SBI as its main bank enables SBI to be the largest bank without any effort or a business strategy. All PSU’s, state and central treasuries keep SBI in the pink of health by keeping large balances in the current account. This is evidenced by the high CASA (Current Account and Savings Account Balances that carry no to low interest as opposed to fixed deposits) of nearly 50% that SBI enjoys. It also shows the incompetency of the PSU’s and government departments in keeping money idle and enriching the bank. Private sector today does not keep money idle. They keep money in liquid funds, even if the surplus cash is for a couple of days at a time. So, here we have inefficient government machinery feeding the inefficient banks. In addition, SBI is always at the forefront of any politically inspired financial giveaways, which no self respecting private sector bank would do. Any bank which has issued shares to the public has no right to give away anything for free. We always see SBI at the forefront of all political drama when it comes to loan waivers or opening of branches in unviable locations. The interesting thing that is going to happen is of the merger of the subsidiary banks. Logically, one would expect a huge amount of cost savings, reduction in headcount as well as selling of surplus real estate. It is not happened yet and given that SBI is a bank that even has a union of ‘officers’ it is unlikely to materialise. So, the large ‘hidden’ values are not getting unlocked at all. The bank continues as inefficiently as ever. It is only because of freebies in the form of high CASA, assured government business etc, the Return on Equity (probably the only measure of how shareholder money is used) is in double digits, though below the large and efficient private banks. The other thing that I look at is the “executive” pay at the PSU Banks. If someone is good, why should he work for that pay? Is he driven by a sense of public service? It is time that the pay for senior executives is on par with private sector. In the absence of parity, I am afraid that either an idiot will run the bank or the corrupt will. This factor is compounded by the presence of unions (including unions for officers” – the management team!) which will not allow one officer to jump ahead of another. I have worked in nationalised banks and have friends who still work. There is a set of people who work hard but cannot make any decisions. There is set of people who shirk work and don’t care a damn about anything and the management of the bank cannot do a damn about them. Then there is a set that lines their own pockets by selling out to businessmen who see corruption as an easy way out. Of course, the CEO is subject to all kinds of political pressures in lending decisions. None of the PSU banks have a long term strategy for business and the CEO generally gets appointed at the fag end of his career. His decision making would be screwed up. If he is honest, he is worried about his pensions and will play it safe. If he is corrupt, then he will go berserk and lend to all kinds of sectors. He simply will not be allowed to execute a ten year vision plan. In short, is it worth investing in to the shares of the PSU outfits, simply in the hope of their being unshackled? R Balakrishnan