NEW YORK - The major U.S. Financial institutions rallied over 10 % this week but they remain at depressed levels. According to the financial markets, the "I" in India stand for Quality when it comes to financial institutions. ICICI Bank, India's second largest lender has a market capitalization of $33 billion despite having contingent liabilities that are twice the size of its balance sheet meaning it has excessive leverage. PNC Financial, the United States sixth largest bank is twice the size of ICICI Bank but its valued $2 billion under ICICI. The reasons for this are unexplainable, PNC has twice the earnings, twice the equity and has better growth in terms of Return on Equity (ROE) over the last year, a key metric in evaluating financial institutions. ICICI Bank had a pretty miserable ROE of 8% in the last year, despite this the company's valuation has soared. It is explainable that the Indian Banks are not growing quickly and it is likely because people in India are extremely poor. At the current growth rate India's economy will be 1/3 the size of today's present U.S. Economy in twenty years. Investors are overvaluing population and undervaluing GDP in arriving at their valuations. GDP is the most important figure. The population could be 10 billion but if everyone makes $1 its banks will not have much success.
Bank of America which is 20 times the size of ICICI has a valuation of only 4 times as much.
Going forward the valuations will need to change dramatically in relation to U.S. and Indian Banks. It is not possible that banks in a country with inherit risk, and without spectacular growth in the banking system can continue having valuations of 1/4 the market cap when they are 1/20 the size. Either the U.S. Banks will go up in value or the Indian banks will decline.
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