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kulman
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   Posted: 17/Mar/2007 at 12:05pm |
Vivek bhai please read this & post your comments/views:
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The banking business is no favorite of ours. When assets are twenty times equity - a common ratio in this industry - mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the "institutional imperative:" the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.
Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices.
--- Warren Buffett Source: letter to shareholders 1990.
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Vivek Sukhani
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Posted: 17/Mar/2007 at 1:01pm |
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well, Kulman, me too small to comment upon the comment of the Big Man.However, I beleive that NPAs also have a cycle( relate it to managerial efficiency) . During economic expansion most of the banks appear well managed. It is when the downcycle starts, the agressive ones start to fumble. Remember, Global Trust bank and Centurion Bank when they were in a spot of bother. Also, think about IndusInd and Bank of Rajasthan. Also, Kulman, the banks do a lot of hush up stuff. So, you cannot take a blanket call based on capital Adequacy and stuff like that. Also, all this talk of fee based income and fund based income also trick me. The point is even the fee based income is very clyclical. Its when deals are happening in the business sphere the fee based income goes up but when they stop to take place, that pot also runs dry. Can you imagine what does 20:1 leverage implies. It implies if 5percent of your disbursements/advances/lending fail, you stand to erode your entire networth in case you decide to write them off. So, dont know Kulman, but I wont like to have a bank in my portfolio for long term, unless they offer me terrific value. Also, banking is also like stock market business.... you lever more to make a faster buck and end up a loser. The only thing I would say here is that, buy them if you see a lot of hidden wealth being stacked in them. That is the reason I will not sell off SBBJ even afetr having made 10 times. I find the PSU Banks' management to be quite reliable. Most of them are extremely conservative, something which suits the investors.
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s_praharaj
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Joined: 10/Sep/2006
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Posted: 19/Mar/2007 at 12:59pm |
Vivek,
I thought I will update you with what I know.
The provioning by the Banks are governed by a set of rules, laid down by RBI. The rules are well definedand clear for different sectors and differenet security type.So the rules for provisioning are uniform across the Banks. Big banks can not take a view case wise as they have to take a overall view on provisioning as per norms laid down by RBI. About underprovisioning or over provsioning by commercial banks, yes to a limited extent it is possible. They can be done two days. Provisioning of loans are broadly based on Asset quality and security quality. In a few cases where qualitative analysis of security is to be done, it can be done both ways and depending upon that the provisions can be made. But the view Banks take should also be certified by Auditors. Again if you see, the Auditors are appointed by the Baks and also paid by them. Here to some extent Banks can influence the Auditors with their logic. The need is an independant panel of auditors by RBI, which can be assigned auditing by RBI. So the underprovisioning and overprovisioning are to be commented by the Auditiors. Sometimes auditors comment on their notes, which also helps to find about the real position.
Apart from the provisioning of the loan portfolio of Banks, the provisioning are also made for investments of the Banks in shares, Bonds and Govt Securities.Here the rules are not very clear and the Banks get some free hand for provisioning.
Due to this there is a underplay or overplay of provisioning by commercial banks.But they are not common occurences. But yes, it is possible and sometimes conceals the real profit.
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Shashi Praharaj
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s_praharaj
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Posted: 19/Mar/2007 at 1:10pm |
Vivek,
Again about your question on weightage of Management in Banks, if you ask me personlly, the PSU Banks are governed by the policies of RBI and Govt of India.The management of PSU Banks are more loyal in following Govt policies than the Govt itself. A dynamic chairman and ED, though dynamic can play their role to a limited extent. Moreover their tenure is also limited, less than two years in more than 90% of cases. But yes, if a conservative and result oriented chairman takes charge of the Bank, he can do wonders.Conservative means I mean profit orinted, who beleives in quality rather than quantity. Some PSU Banks are having such top management teams also but by and large most of them are business oriented, with a herd mentality and having an eye on quantity of business rather than the quality of business.
Edited by s_praharaj - 19/Mar/2007 at 1:12pm
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Shashi Praharaj
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basant
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Posted: 19/Mar/2007 at 1:24pm |
The need is an independant panel of auditors by RBI, which can be assigned auditing by RBI. So the underprovisioning and overprovisioning are to be commented by the Auditiors. Sometimes auditors comment on their notes, which also helps to find about the real position.
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Very interesting. If that happens shall we see a gush of some fresh NPA's? But from I know NPA accounts are those that have not serviced their interest and loan repayments for two successive quarters. Can a Bank twist these data because they are so mechanical to spot.
Any specific PSU Banks that work like their private sector counterparts?
Edited by basant - 19/Mar/2007 at 2:45pm
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s_praharaj
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Posted: 19/Mar/2007 at 2:27pm |
Basant,
What you tell is to classify it as NPA. That too after the repayment holiday.
But all NPS need not be provisioned. Only where security is not adequate, that amount is to be provisioned. Wherever security is in deposit or cash equivalent, there is no confusion. But when the security is machinery, stock, landed property etc, a realistic assessment is necessary, which sometimes helps in under provisioning or over provisioning.
But now with the vigil of RBI, its a little difficult.
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Shashi Praharaj
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basant
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Posted: 20/Mar/2007 at 6:14pm |
While the PSU Banking stocks have been written off I feel that they are coming to a point where buying them would have minimum downside risk. The table below indicates the adjusted book value of the Banking companies in Fy08. So even if interest rates were to harden from these point these banking stocks should not trade below their adjusted book value on a consistent basis. Any fall in the price of these stocks below their adjusted book value should be used to buy into them.
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Bank |
Adjusted Book Value Fy 2008 (Rs) |
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SBI |
761 |
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PNB |
374 |
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Canara Bank |
213 |
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Bank of India |
125 |
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Bank of Baroda |
259 |
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Union Bank of India |
95 |
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Oriental bank of Commerce |
227 |
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Corporation bank |
292 |
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LIC Housing Finace |
161 |
Source: ENAM Research
While the price moving closer to adjusted book value protects the downside it does not guarantee an upside. SO what investors need to think is that these prices are indicative bases where they could buy these companies but if someone expects these stocks to move fast again on a market upturn then he could be mistaken.
Lower the price to adjusted Book Value greater the margin of safety. Since the growth in these PSU banks is erratic this is the best yardstick to use for these banks.
Now if it comes to evaluating HDFC Bank then we would need to apply the traditional PE method rather then the adjusted price to book method. That is because HDFC Bank is a growth stock and growth stocks are generally not evaluated on price to book basis.
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kulman
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Posted: 20/Mar/2007 at 6:52pm |
Noted.
- These Banks have large Govt Securities/Bond portfolio. With rising interest rates+lower yield effect, how is it being valued?
- Would there be any erosion in BV on account of Bad loans+NPAs. If so, has it been considered?
- To meet Basel-II norms, some of these Banks might raise Capital via Rights/FPO, i.e. dilution of equity. What will be likely impact on BV/valuation?
- Finally I need S&P* rating for these Banks, i.e. ranking them in order of investment preference.
*SP=Shashi Praharaj
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