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Saturday, July 21, 2007

SBI vs. ICICI Bank

Business World has an opinion piece comparing State Bank of India against ICICI. It argues that the unflattering comparison shows the power of privatisation.


  1. The quality of writing, including that by their columnists, in Business World is so uniformly poor that there is hardly any point in responding to it.

    However, when an otherwise thoughtful and critical analyst like Ajay Shah refers to and implicitly approves or endorses a piece in the magazine when has to take notice.

    So let us accept that ICICI outscores SBI on every performance parameter. But how, on earth does that make SBI sick? This leap of logic is breathtaking even by BW abysmal standards.

    Does the article show the "power of privatization"? For one, ICICI was always a quasi-private institution, certainly in operation, even if not always in ownership. And during its years of existence it has not been a one-way street to success - there have been several serious setbacks. In fact, what is being celebrated these days is the merry ride of the past 3-5 years. Whether these celebration are premature time will tell. Its loan book is already exhibiting signs of stress with increasing NPAs and lower NII margins.

    While SBI performance may not be as spectacular it is no pushover either - witness its market cap and growth in it and even other profitability parameters.

    The BW writer gives great store to the rapid growth of ICICI vis-a-vis SBI. But if growth were the criterion what of the old private sector bank which have been in existence for a few decades or even a century and would not even match the size of a single large SBI branch. If privatization were to ensure growth or success they should have been several times the size of ICICI.

    Another useful counterexample is UTI bank which despite the handicap of its parentage and its ownership (predominantly public sector entities) has set a scorching pace of growth. And HDFC Bank though not as big as ICICI probably beats the latter on virtually any parameter one may choose.

    This is the most serious objection to the article - rank poor methodology. Pick up a bank of one's choosing and show whatever one desires (pre-conceived notions?) and the rest of the evidence be damned.

    The purpose of this note is not to hold a brief for SBI or show ICICI in a poor light.

    It is to show an example of poor analysis and writing. And how when one finds articles supportive of one's views one can quote or endorse without subjecting them to critical analysis as one does to other pieces.

  2. I agree with you that all the "new private banks" have done very well - there is no case for singling out ICICI Bank. If anything, as you say, the ratios show HDFC Bank as being the leader. UTI Bank is also doing very well (I personally happen to be a happy customer. Thank you Meeru!).

    If you gripe is about a shortage of serious analysis of what is going on with Indian banking, I agree with you completely. There is a need of more scholars writing thoughtful research papers. But then, that's the affliction of all Indian economics, where there's a shortage of good solid empirical papers which frontally focus on the questions of the day.

    Is the story of ICICI Bank vs. SBI about the power of privatisation? I do think so. I have known ICICI Bank personally from the late 1980s onwards. There is little doubt, in my mind, that the privatisation was a critical event in its history. Yes, we should always be cautious when any bank runs up very high growth rates of assets. But looking under the hood also, one today sees an organisation which is qualitatively different as compared with what it was prior to privatisation.

    How strong is SBI? SBI has so many natural advantages - a huge branch network, government business, de facto State guarantee for all deposits - that it is all too easy for SBI to "do well". The more useful counterfactual is: How would SBI fare if the government sold it off? Could a new management team do much better? I think the answer is clearly yes. May I point you to Table 4 on page 23 of this paper (Rajan & Shah, 2005). No sensible private owner of SBI would do that.

    Playing the new world of globalised finance with sophisticated financial instruments requires HR policies which SBI finds structurally infeasible. ICICI Bank has achieved a complete transformation of HR policies compared with the pre-privatisation state. In my mind that is the single biggest issue about the outlook for a bank.

    SBI's market cap vs. ICICI Bank's market cap: If you express both as percent of the size of the bank (pick your favourite metric) then you see a very different picture. SBI is much less effective at translating an enormous asset base into market value.

  3. All new private sector banks have done well. Or so it seems until we scratch our heads and remember GTB (bankrupt due to mismanagement, if not fraud), Times Bank (sold to HDFC Bank quite early on by Bennet Coleman who are a very strong and astute group), Centurion Bank (fairly severe loan quality problems, and bought out by a new set of promoters) and Bank of Punjab (not quite making the grade). Suddenly the picture seems quite a bit different.

    Three successes - ICICI, HDFC Bank and UTI Bank. Is the last of the lot a private sector bank?

    Old private sector banks are a middling lot, I would think.

    I think the whole PSU vs. private sector debate is overdone. It is really a mixed picture. PSU banks including SBI enjoy great benefits but also suffer handicaps. On balance, who knows?

    One must grant it to the PSUs that they have done a reasonably good job over the past few years - arguably, on virtually all fronts - manpower rationalization, NPAs, growth, new products, technology, even customer service. Maybe not as well as some of the private sector ones but they can hardly be called disasters.

    It may well be that the rising tide - of economic growth - has lifted all boats - private and public. As Warren Buffet says it is when the water goes down will we know who is swimming naked.

  4. Many private banks have failed. I think that's perfectly okay. In finance, as in all industries, we need the creative destruction of firms that are born and firms that fail. What is best for India is a steady pace of entry & exit. In the securities industry, for example, there is a delicious ongoing process of firms that start up and firms that exit. This is one of the key reasons why the healthiest piece of Indian finance is the securities industry.

    There are PSU banks that ought to have closed down, but haven't, thanks to government interventions. That's no statement on the health of PSU banks. PSU banks would be healthier today if they did not have access to taxpayer funds.

    ICICI Bank / HDFC Bank / UTI Bank are the best run private banks. Foreign banks are pretty well run. Compare these against SBI - the best run PSU bank which has a host of advantages by virtue of being guaranteed by the State. The picture comes out quite clearly that banks work better with private managers.


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