Elephant can146;t sprint

SBI employees8217; strike proves the market right. The bank deserves its low PE

A colleague and I have an ongoing notional bet. He has notionally 8216;bought8217; 100 ICICI bank shares and I, SBI shares. He thinks that the private sector banks are so hungry that all the inherent advantages of the PSU elephant will wither away. He says he8217;s happy buying ICICI Bank at a price earnings PE ratio what I am willing to pay for each rupee of profit today of 22, double of SBI8217;s PE. And I use the Indian proverb and tell him that even a dead elephant is worth a lot of money. This elephant, though, is nowhere near dying and is shuffling along nicely right now.

I pull out statistics that say that SBI has the largest branch network, with over 9,000 branches in India and 54 overseas. Its deposit base, at more than Rs 300,000 crore, is more than twice as large as ICICI8217;s and HDFC Bank8217;s put together. Its net profits, at more than Rs 4,000 crore, are double those of its nearest private sector universal bank. Profit per employee grew from Rs 176 to Rs 207 last year. Imagine, when the branches begin to sell insurance and funds, what the fee based income will do to the bottom line. He talks of the 80 per cent plus rate of growth of private sector banks. I talk of the big daddy status of SBI.

But today I avoided meeting this colleague. The reason for my dodge is the nationwide SBI strike. All my arguments in support of a reforming PSU bank with a great future suddenly sound hollow. With one stroke the SBI employees have poured water over all the good work done over the last two years in showing a new face to the customers, shareholders and the world. Remember the queues and tokens? The sweater knitting dowagers? The peanut eating, paan chewing clerks? This image of the erstwhile sluggish, frumpy and slothful public sector bank was beginning to give way in just two years of reform.

Wanting to at least be able to argue with my colleague, I try and find out the issues behind the strike and pull out a rotting bug called labour reform. On the face, this strike is about the pension of 2.1 lakh employees who want parity with the central government staff for their pension benefits. Despite two revisions in wages, the pension rates of SBI employees have not been adjusted upward. The striking employees are asking for a removal of the ceiling that exists on pensions. The extra hit of Rs 180 crore, say the employees, is well within the resource ability of SBI to handle. The management agrees with the unions they, after all, benefit as well. But the finance ministry is not playing ball and has not agreed to the pension demands of the SBI union. The union, after exhausting all forms of protest, feels justified in striking work.

The ministry has its reasons other banks will want the same, PSUs will want more and Left gets fuel to make more noise and disrupt work, but the argument is layered even within SBI. With more than three quarters of the employees over the age of 49, the clamour for pension revision is raucous. Muted in this demand for more is the voice of the new generation of SBI officers, who look at their careers very differently. The attrition rates in the below 40 age group are high and the ultimate pension carrot is not incentive enough for a generation that prefers to be in control of its life. The private sector banks, stress the young officers who have been at the front leading the image makeover, will soon advertise their non-striking banking hours, putting to waste the whole image makeover the SBI undertook.

If the dissent within is muted, the upset outside is vocal. Some of the several lakh SBI customers are visible already on TV and, though the lines of depositors outside closed bank branches will get the soundbites, more deeply and quietly the dynamics of the Indian banking sector will change, depending on which way the strike ends. Reason? The big daddy status of SBI in Indian banking. The biggest bank, with the most branches, customers and money, SBI has a strong control over Indian banking. With more than 15 per cent of call money transactions being done by SBI, the bank is the rate setter in this market as well. It is also the informal arm of the RBI to carry out its forex interventions. A strike like this throws the entire banking sector into disarray.

But this short-term upset will end because somebody will blink, the bank will be back in business soon and the real impact of the strike will be slower and much more powerful. If the bank employees win, it will eventually affect the prime position of the bank. Today, despite the talk of independence of the banking sector, the market is skewed heavily in favour of the PSU giant. SBI is the rate setter in the deposit, credit, forex and call money market since it has the financial muscle to do so. But any burden on the resources 8212; for example, an extra hit of the pension bill to an ageing organisation 8212; will adversely affect the pricing power that the bank has. It may be unable to set rates any more as customers shop for the best bargain. Private banks, which run tight ships some banks do not hire anybody over age 30, there are no peons in private sector banks and costs are tightly controlled, are waiting for this to happen to gather market share and pricing power from SBI. The other sorry result of SBI employees winning will be that the Left would jump in to enlarge the impact across the banking sector in particular and PSUs in general.

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If the government wins, look for the long overdue labour reform and bank privatisation in five years. And maybe, my notional punt on India8217;s biggest bank will play out. But in the short term, the market is absolutely correct in valuing the nimble un-unionised private sector banks double of what it values SBI.