Banking on Net to raise valuations
Feb 21,2000
By Prabhakar Sinha
With the advent of internet-based information technology, the market place is witnessing a major shift in valuation parameters.
The premium is no longer for the size of the company, its positioning in the market or, for that matter, even its brand value. This shift is definitely evident in the banking sector.
Banks which are technology savvy and have gone into hitech internet banking, have seen their valuation improve drastically. As the trend changes, investors must identify banks adopting technology to attract valuation, for fresh investment. Large banks might give one a sense of security but not high returns.
Consider some of the tech savvy banks. HDFC Bank, with a total deposits base of Rs 2915 crore and 250 branches, is quoting at price to earning multiple of 48. ICICI Bank, that has a deposit base of Rs 6000 crore and 60 branches in the major cities, has a price earning multiple of 32.3.
HDFC Bank and ICICI Bank are presently quoting at Rs 250 and Rs 180 against their book values of Rs 17 and Rs 18.7 respectively. This implies their share price is 10 to 15 times the book value. Around six months back these banks were quoting at around Rs 50 and Rs 35 only.
HDFC Bank and ICICI Bank are presently quoting at Rs 250 and Rs 180 against their book values of Rs 17 and Rs 18.7 respectively. This implies their share price is 10 to 15 times the book value. Around six months back these banks were quoting at around Rs 50 and Rs 35 only.
On the other hand, the country's premier bank, State Bank of India, despite its massive network of around 9,000 branches and a deposits base of Rs 1,69,000 crore, is quoting at a PE ratio of 13.3 only.
The massive network gives it access and enables it to mobilise funds cheap. Its cost of funds is in the range of eight per cent per annum only whereas that of the private banks are in the range of 11 per cent per annum. But the bank's share is currently quoting at around Rs 250 against its book value of Rs 197.
The general explanation for this kind of stark difference in share prices is on account of efficiency of the bank, particularly on the basis of non performing assets. On that score, Corporation Bank which is rated as the best bank in the country on various parameters by many agencies in 1999, continues to have low valuations.
Its net NPA is only 1.98 per cent, one of the lowest in the industry. But its stock quotes at Rs 110 against its book value of Rs 105. Its present share price is at a PE ratio of six. The bank has an impressive track record of high profitability of over a decade. On an equity base of Rs 120 crore, it has earned a net profit of Rs 192 crore during 1998-99. It has a deposits base of Rs 12,600 crore.
Another example is of Oriental Bank of Commerce (OBC) with its huge branch network of over 1000 branches and term deposits base of Rs 1680 crore. Presently, the share of the bank is quoting at Rs 38 at a PE ratio of only four.
What has changed investor sentiment today is companies' capacity to adapt to changes taking place across the globe. In the present market, investors are assigning values to a company which can adopt sophisticated technology and e- commerce. Worldwide, there is a paradigm shift in product and service delivery.
In this situation, computerisation of a bank's branch network is important but far short of the ultimate goal. Now bankers are talking about reaching customers at their doorstep to deliver services at no additional cost. A senior fund manager expects banking on internet to increase profitability of banks by at least 40 per cent.
It is here that public sector banks seem to have faltered leading to low valuations. They have so far failed to adopt cutting edge technology owing to inherent contradictions. Fund managers and large investors argue that these PSU banks might look sound on paper today but their future does not seem bright. If they do not change, they are bound to perish.
Tech savvy banks would be able to extend their reach to a large part of the country at low cost. In fact, these banks are planning to open their back offices in remote areas and start a large number of financial kiosks in local market centres where customers can access ATMs.
These banks are also expected to be able to integrate the entire value chain of customers, retailers, manufacturers and suppliers seamlessly. They can enhance business value by providing various products on web. Customers can make pay telephone, water and electricity bills.
With the cyber law to be in place shortly, payment on internet will be allowed. In that scenario, even middle class families would like the convenience of internet banking.Businesses will also gain as suppliers and distributors are linked in a closeloop.
Various projections prepared by research institutes suggest Internet penetration will increase rapidly. According to IDC, Indian internet users will grow at 76 per cent annually from 5 lakh in 1998 to 45 lakh in 2002 and 1.23 crore in 2005. In a middle class base of around 5 crorefamilies, 1.23 crore Internet connection would be a large number.
In that scenario, banks that can provide cheap services on Internet would easily tap the large number of upper middle class customers who are anyway the main depositors in the country. That is perhaps driving valuations of banks like HDFC and ICICI bank.
-Times Of India |
