Public & Private Banks: Who Comes Up Trumps?

With changing economic cycles, a country’s banking sector also goes through crests and troughs. It is inextricably linked with the economy, and thus, becomes a barometer of its performance. In India, public and private sector banks have both shaped up strongly over time. Shashikant reviews how the Indian banking sector has fared over the last five years.

The Indian banking sector has come a long way indeed. Starting out from the British Raj, over time they moved to private ownership. Then came the wave of nationalisation during Indira Gandhi’s Prime Ministerial tenure, and finally, the opening up of the sector to private players in 1990. With the progressively changing economic environment, the government has taken decisions to create a viable, competitive and efficient banking system in India.

Today, we are at a moment of change once again. Now, when the RBI is ready to give out licences to new players, it is an opportune time to look at the performance of the two sets of banks (public and private sector banks) over the last few years (especially after the banking crisis of 2008) and see how have they fared.

Despite over 20 years of liberalisation and many private players foraying into the Indian banking system, it is still dominated by public sector banks, which account for 80 per cent market share while private sector banks make up the remaining 20 per cent as at the end of FY13.

To get a better perspective on the performance of the Indian banking sector, we have studied the industry’s financials for the five year period between FY09 and FY13. For the purpose of our study, we have analysed the performance of 37 banks in all, both public sector (22) and private sector (15) banks.

Total Assets

The size of a bank determines its importance not only in the banking industry but also in the economy. This was appropriately captured in the US post the Lehman Brothers bankruptcy, wherein the Dodd-Frank Act said that many banks had become “too big to fail” and needed government intervention to bail them out at the height of the financial crisis in 2008.

The best way to gauge the size of a bank is to look at its assets. The 37 banks that we studied have seen their total assets increasing from nearly 79 per cent of the GDP at the end of FY09 to nearly 84 per cent of the GDP at the end of FY13.

Growth In Banks’ Assets (As A Percentage Of GDP)

In terms of assets, the overall size of the banks has almost doubled in the said five-year period. The pace of growth, though, was better for the private sector banks, which saw their assets growing at the rate of 18.35 per cent annually against 17.02 per cent for public sector banks. Despite such growth, private sector banks still form just one-third of the assets of public sector banks and have hardly shown any improvement from the FY09 levels.

YES Bank’s balance sheet size grew at the fastest clip of 44 per cent annually. Among public sector banks, Bank of Baroda grew at a rate of 24.6 per cent annually.
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Total Income

It is believed that larger assets help banks in generating larger income. This is largely revealed in the growth in the total income of banks. In our study, public sector banks have demonstrated better growth than their private counterparts and have grown at a CAGR of 18.3 per cent for the five years ending FY13. In the same duration, private sector banks’ total income has gone up at an annual rate of 17.7 per cent.

The major dragger among private sector banks was ICICI Bank, whose total income grew by a mere 5.8 per cent in the same period. YES Bank saw its total income growing at the fastest pace of 40.7 per cent. In the case of public sector banks, Dena Bank’s total income witnessed a CAGR of 25.3 per cent.

Net Interest Income

There are two factors that make up the total income, viz. interest income and other income. However, to get a more objective picture of the banks’ performance, we need to deduct the interest expended to generate such interest income, which is captured in the growth of net interest income (NII). The overall interest income of the banks has increased by 20.6 per cent annually in the five years ending FY13. There was no major difference observed in the NII growth between public and private sector banks, with both growing at almost the same pace of 20.6 per cent.

Some banks like IDBI and IndusInd Bank have grown at double the pace of the industry, with their NII moving up at an annual rate of 48 per cent and 44 per cent respectively over the period between FY09-13. One of the reasons for such a stupendous growth rate was the base effect, which was lower for these banks.

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Net Profit

In all the parameters considered so far, public sector banks were either leading or in line with private sector banks. When it comes to net profits, however, PSBs lagged behind their counterparts. Private sector banks have seen their net profits rise by thrice as much compared to that of public sector banks in the five years through FY13.

One of the factors responsible for such low growth is the drop in profits of some of the major banks like Bank of India and Indian Overseas Banks (profits annually down by 2.2 per cent and 19.1 per cent respectively) over the last five years. Nonetheless, all the PSBs remained profit-making. Private sector player Dhanlaxmi Bank is the only one in the Indian banking industry that was in the red for FY13.

Asset Quality

The slower pace of growth in the net profit for public sector banks is mainly attributed to the deteriorating asset quality of banks. There is an overall improvement in the asset quality of private sector banks, with the average net NPAs reducing from 1.2 per cent at the end of FY09 to 0.89 per cent at the end of FY13. Their public sector counterparts, though, have seen their assets worsen, the average net NPAs increasing from 0.78 per cent to 1.86 per cent. This indicates that the situation has somewhat reversed in last five years on this front.

Return On Assets

The entire operations of banks are ultimately reflected in the returns they generate on their assets. This largely captures how efficiently the bank employs its assets. Once again, private sector banks seem to have outperformed the PSB group. The average Return on Assets (ROA) of private sector banks has improved by 45 basis points in the last five years to 1.44 per cent. In the same period, PSBs saw a decline of 18 basis points to 0.82 per cent.

J&K Bank (1.6 per cent) among PSBs and City Union Bank (3.51 per cent) among private sector banks have the best ROAs.

Conclusion

Our analysis shows that private sector banks have performed better than their public counterparts overall in the last five years with regard to some of the important parameters. Nonetheless, this is not a conclusive statement, as there have been other times when PSBs performed better than private banks on the same parameters where they are currently lagging.

The performance of banks depends greatly upon the economic cycle and their exposure to stress sectors. In the present scenario, infrastructure, metals and mining are some of the sectors that are pain points for the economy, and as PSBs have larger exposure to these, they are naturally lagging behind. Once this cycle takes a turn, we may see PSBs returning to form and maintaining a pace similar to the private players.