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Private vs Public Comparison of NPA Positions
Feb 8, 2016

Continuing with our discussion on PSU banks, we came across an interesting chart in the Business Standard today. It showed the NPA position of the worst off private sector bank versus the worst off public sector banks. The chart below shows the same.

As you can see, the worst off private sector banks are in a relatively much better position as compared to their counterparts from the public space.

Some of the key reasons for the public sector banks to be in a mess include the continuation of lending to the stressed sectors. Particularly infrastructure, mining and power. Also the PSUs have much larger exposure to corporate groups with poor cash flows. All of this has only led to lower margins for the public sector banks; as a result of which, there is a substantial difference in share price returns of stocks from these spaces. As pet the Business Standard, Rs 100 invested in the Nifty Private Bank index at the start of 2013 would be worth about Rs 142 today. Same amount invested in the Nifty PSU Bank index would be worth about Rs 59.

The interesting bit is that all of the public sector banks are now trading way below their respective book values. While this may seem very attractive, it also does give sense of how the market has given up hope on stocks from this space. In comparison, majority of the larger banks from the private space are trading about two times their respective book values. Stocks of Kotak Mahindra and HDFC Bank trade in excess of four times their book values; these valuations are believed to be amongst the highest in the world at present.

So should one be looking through the rubble of the carnage of the public sector bank stocks?

While it is easy to paint all PSU banks with the same brush, given their government ownership, the fact is that within the space there are players with different kinds of strengths and weaknesses. It will definitely take a lot for even the best PSU banks to fetch the valuations that their private sector peers deserve. But, in the meanwhile, the deep discount valuations definitely leave room for sufficient upside in select few.

Data source: Business Standard, Capitaline

This Chart Of The Day was published in The 5 Minute WrapUp - The Three-Step Guide to Be as Successful as Buffett...

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