MUMBAI (Reuters Breakingviews) – Prime Minister Narendra Modi is ready to cut his losses in banking. His government wants to privatise lenders long seen as untouchable, aiming to sell two in the next financial year. Earnings from one potential candidate, Tamil Nadu-based Indian Overseas Bank, show why he’s keen.
Until now, New Delhi has concentrated on consolidating lenders into fewer, healthier institutions that can take advantage of economies of scale and be relied on by the state. It announced four mergers in August 2019, cutting the number of banks it controls from 27 to 12. The biggest deal led by Punjab National Bank created the second-largest lender after $49 billion State Bank of India. Bank of Baroda earlier mopped up peers.
That leaves six weaker institutions that are more likely to go on the block. Of these, three are in such poor shape the regulator has curbed their lending. Indian Overseas’ earnings announced on Tuesday show it’s slowly clawing its way out of the sin bin: It eked out an annualised 0.28% return on assets in the three months to the end of December, compared to a loss in the same period in 2019.
The improvement helps justify its forward valuation of book value. That’s a multiple global giant Citigroup can only dream of – it trades at less than three-quarters the net value of its assets despite a return almost three times higher. But privately owned Indian banks like $60 billion ICICI and $120 billion HDFC Bank are worth 3 times book or more.
New Delhi has paid to put Indian Overseas on the right track, infusing $2.7 billion over the past two financial years, per rating agency ICRA, an amount exceeding the lender’s market value. The government’s stake has risen to 96% from about 80% in 2013. And it still needs growth capital. In 2019, taxpayers lost on average 23 cents for every dollar India spent on state banks, officials estimate.
Indian Overseas and its 3,000-strong branch network is a potential prize in a market where demand for financial services vastly outstrips supply. But any new owner, whether tycoons or financial investors, will want to cut staff, pick its own board and financially incentivise management – freedoms not afforded to state lenders despite years of lobbying. Modi’s privatisation goal will test his reform credit.
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