The Indian government has set a divestment target of Rs 1.75 lakh crore for FY2021-22. It is perceived that state-run banks are not performing to their potential for a variety of reasons. The recent announcement by the Ministry of Finance to privatize some of the public sector enterprises (or PSUs) pushed the index up. The index jumped 0.88% in the week ended July 2 from a month ago. Over the past 12 months, it has climbed 71.6%.
The privatization of the bank will reduce the government’s active participation in the day-to-day operations of the PSU banks.
We learn that NITI Ayog has recommended the privatization of the Central Bank of India (NS 🙂 and the Indian Overseas Bank (NS 🙂 to the government. The proposal must be carefully and critically reviewed by the Ministerial Panel before a Cabinet nod. The government is also working on amending the Law on Nationalization of Banks and the Law on Banking Regulation. Along with the Central Bank and the Overseas Indian Bank, we also shortlisted the Bank of Maharashtra. We believe that these bank stocks are likely to benefit from the government’s privatization campaign.
Central Bank of India (NS 🙂
The bank was a serious competitor in one of the six unmerged PSU banks to be privatized. In the fourth quarter of fiscal 2021, the Central Bank of India recorded a net loss of Rs 1,349 crore with a capital adequacy ratio of 14.81%. Its gross NPA and its net NPA were 16.55% and 5.77% respectively during this period. The bank’s revenue CAGR was 12% over the past five years. Its financial metric is lower compared to other PSU banks. The government’s stake in the bank remains at 89.78% and the free float of the Central Bank amounts to 10.22% of the shares. The bank was placed under the rapid corrective action urged by the Reserve Bank of India due to the weakness of financial indicators. The privatization buzz has already increased the share of the Central Bank, and it hovers near a high price of Rs 29.65 over 52 weeks.
Indian Overseas Bank (NS 🙂
Founded in 1937, the Indian Overseas Bank became a public bank after its nationalization in 1969. The Indian government owns 95.84% of the bank. It was the first bank to embark on consumer credit by offering a personal loan. The bank has shown a growth path on both the income and earnings front over the past four quarters. In the fourth quarter of fiscal 2021, the bank’s net income more than doubled year-over-year, from Rs 144 crore. Gross NPA fell to 11.7% from 14.8% during the same period. The bank also plans to raise capital in the form of rights issues during fiscal years 2021-22. Indian Overseas Bank’s share price is trading near a 52 week high of Rs 29. The 52 week high and 52 week low of the stock is Rs 29 and Rs 8.5, respectively.
Bank of Maharashtra Ltd (NS 🙂
The Bank of Maharashtra is another bank in the process of being privatized as part of the government’s divestment plan. The bank had around 1,900 branches across the country at the end of fiscal 2021. It intends to increase Rs 2,000 crore through qualified institutional placements (or QIPs). After the proposed capital increase, the government’s stake in the bank will be reduced to less than 85%, compared to 94% currently. The bank aims to increase its loan portfolio from 16% to 18% in fiscal year 20211-22. He reorganized his loan portfolio to focus on increasing loans to top-rated businesses. This should help reduce bad debts in the future.
The bank’s net profit rose 41.4% in fiscal year 2020-21 to Rs 550 crore from Rs 389 crore a year ago. Operating profit jumped 39% to Rs 3,958 crore during the same period. Its gross NPA fell to 7.2% from 18.6% in FY2020. The stock is currently trading at a discount of 21.8% from its 52-week high of Rs 32. After the divestment, the retail activities of these banks, as well as the global operations, will be reorganized. This should give momentum to these actions.
