Well, to each their own, but here are some metrics that one may want to consider looking
๐๐๐๐ ๐๐จ๐ฆ๐ฉ๐จ๐ฎ๐ง๐๐ข๐ง๐ : Long term stock price compounding for banks follow Bookย Value / Share compounding, which in turn depends on
๐๐๐ = ROA * Leverage
๐๐-๐๐ง๐ฏ๐๐ฌ๐ญ๐ฆ๐๐ง๐ญ๐ฌ (incl equity raises)
a. ๐๐๐ญ๐ฎ๐ซ๐ง ๐จ๐ง ๐๐ฌ๐ฌ๐๐ญ๐ฌ:(Net Interest Inc + Fees + Treasury Inc – Op Expense – Provision – Tx) / Assets
NII is the interest earned on loans given – interest paid on deposits; Fee income is loan processing, credit card fees etc
An ROA of 2% means that the lender makes Rs 2 on a loan of Rs 100
4 largest private banks have ROAs ranging 1.3-2.4%, while all PSBs are < 1%
b. ๐๐๐ฏ๐๐ซ๐๐ ๐: Assets / Equity
PSB SBI has an equity of Rs 6 on assets of Rs 100, making it 17x leveraged, while HDFC and Kotak have equity of Rs 12.5 and Rs 20 on assets of Rs 100
BS of quality private are levered 5-9x equity, while large PSBs 13-17x
Lower the leverage the better. Why?
When you have levered balance sheets, a small change in asset quality wipes out a big portion of your equity, leading to credit agency downgrade and stock falling. ROE supported by high ROA and low leverage reduces earning volatility
Private banks 10 yr avg ROE has ranged 10-18% while PSBs have ranged -1-7%. With an improved cycle, SBI has reported a TTM ROE of 12%, but this has come on the back of 17x leverage
There have been several past instances where PSBs (and others) have reported high GNPAs. Even in F22, PSB GNPA is over 2x of private banks
With this understanding, I will summarize ๐ฐ๐ก๐ฒ ๐ซ๐๐ญ๐๐ข๐ฅ ๐ข๐ง๐ฏ๐๐ฌ๐ญ๐จ๐ซ๐ฌ ๐ง๐๐๐ ๐ง๐จ๐ญ ๐๐ ๐ฌ๐ฐ๐๐ฒ๐๐ ๐๐ฒ ๐ ๐๐๐ฌ ๐ข๐ง๐ฏ๐๐ฌ๐ญ๐ข๐ง๐ ๐ข๐ง ๐ฅ๐จ๐ฐ ๐/๐ ๐๐๐๐ฌ:
๐. ๐๐๐ ๐๐จ๐ฏ๐ญ ๐จ๐ฐ๐ง๐๐ซ๐ฌ๐ก๐ข๐ฉ: Interest of the majority shareholder are put first (nothing wrong), but interests of minority shareholders like me may not be the same as those of the govt
๐. ๐๐๐ซ๐ค๐๐ญ ๐ฌ๐ก๐๐ซ๐: Private lenders have gained share from 20 to 40% at the expense of PSB
๐. ๐๐ซ๐จ๐ฐ๐ญ๐ก: PSB loan growth 7%; Private growth 18% over F12-22. Current lending market size is 170 Lakh Cr. This market has more more than quadrupled every 10 yrs starting 1950 and the trend is expected to continue moving forward given the low credit penetration. Quality private lenders are expected to continue taking share away
๐. ๐๐ข๐ ๐ก ๐๐๐ฏ๐๐ซ๐๐ ๐: optically high ROEs for select PSBs (like SBI) supported by high leverage and not high ROAs. When asset quality issues surface again, high levered lenders would be the most impacted. On the other hand, quality lenders will be relatively unscathed
๐. ๐๐๐๐ ๐๐จ๐ฆ๐ฉ๐จ๐ฎ๐ง๐๐ข๐ง๐ : Over the last decade quality private lenders have compounded BV 10-20% on the back of ROA led med-high ROEs, while PSB -3-7%. Since stock prices follow BV, PSBs have delivered no/low returns over the last decade