The Indian banking and financial services sector (BFS) destroyed 22 paise of market value added (MVA) for every rupee invested in it, which is really poor compared to the BFS sector in the US, which created 92 cents of MVA per unit of invested capital. The good news is that the performance of the wealth creating Indian banks has been better than that of the wealth creating US banks.

But the really bad news is that the banks, which destroy 59 paise of wealth for every rupee invested, consume about 88 per cent of the total capital invested in our BFS sector. As a benchmark, the US economy invests 83 per cent of its capital in wealth creators. The sad tale of improper capital allocation in the entire Indian economy is also played out in the BFS sector.

In the Banking and Financial Services sector too, the winners on the MVA-scale are different from those on traditional size-based measures such as total assets, revenues, profit after tax (pat), and market value of equity. Indeed, the banks with the most assets such as State Bank of India (SBI) and Industrial Development Bank of India (IDBI) are amongst the biggest wealth destroyers. SBI tops on size-based measures like revenues, pat, total assets, market value of equity, but appears among the bottom ranks for wealth creation (MVA and MVA/Capital). On the other hand, HDFC and HDFC Bank top the MVA rankings even though they do not appear in the top 10 ranking based on total assets or revenues. (See The Winners & The Losers).

HDFC has continuously increased both its MV and MVA. It created high shareholder value while consuming little capital even as it remained on a high-growth track. Its performance seems particularly impressive given the fact that the rest of the sector seems to be on a wealth destruction binge.

The difference between the wealth creators and destroyers in the sector is sustained economic performance and not just good accounting results.

It is not surprising therefore to see that HDFC has consistently improved its EVA. In contrast, the rest of the banking sector shows negative declining EVA performance.