Public sector banks seen besting private sector peers in RoE

Public sector banks (PSBs) have fared better than their private sector counterparts in terms of return on equity (RoE) in the last two financial years, breaking with the trend seen over at least six previous years, says a report by Avendus Equity Research.

The trend may be here to stay, Chandana Jha, banking analyst, Avendus Equity Research, suggests in the report, released last week.

RoE measures a bank’s profitability by revealing how much profit it has generated with the money shareholders have invested.

India’s second-largest lender, ICICI Bank, had the lowest average RoE of 9.2% in the March 2008-March 2010 period, while Punjab National Bank (PNB) had the highest, at 24%.

The figures are likely to be maintained in the March 2011-March 2013 period, with ICICI Bank’s average RoE at 10% and PNB’s at 24.1%, says Jha.
“Due to lower equity dilution, most PSBs have either sustained or increased their RoE during the past decade.

This is in contrast to the decline in RoE for new banks, which was partly driven by frequent capital raising. Despite the lead in loan growth over PSBs, the RoEs of new banks may not diverge and may stay below that of a few PSBs during March 2011-March 2013,” Jha writes.

For state-owned lenders, the RoE performance has largely been a result of improving profitability.
“Our profitability has improved over the years and that helped us to maintain higher RoE. We hope to maintain this going forward,” said M D Mallya, chairman and managing director, Bank of Baroda.

Another reason is that Tier-I capital, which is the core measure of a bank’s financial strength from the regulator’s point of view, has been kept lower than for private sector banks. This has helped them achieve higher leverage.

“The profits of peer banks remain the same. If they have more equity than us, then the RoE can get depressed. In our case, the Tier-I capital is 8.47%, whereas the private peers have much more. The leverage is slightly higher in our case,” said B A Prabhakar, executive director, Bank of India.