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Banks: Analyse them...

Jan 21, 2003

It has been a dream run for banking scrips on the stockmarkets in the last three months. The gains have been irrespective of their background (private or PSU). We have listed a few prominent gainers and have tried to analyse the reasons for this change in perception regarding the banking sector.

Price (Rs) Increase over
3 months
PBR (x) P/E Cost to
income ratio
Net NPA (% of total assets)
HDFC Bank 223 8% 3.2 17.4 45% 0.7%
UTI Bank 45 25% 1.4 4.9 42% 3.3%
IDBI Bank 30 40% 1.4 5.8 48% 1.2%
ICICI Bank 144 5% 1.3 7.7 48% 4.9%
Vysya Bank 252 0% 1.0 8.3 57% 1.9%
Latest available figures

If we take a look at private banks, the increase in the stock price has been a bit subdued as compared to their public sector peers. Private sector banks already commanded higher valuations due to the simple reason that they were more efficient, with lower NPAs. Private banks have come to the limelight mainly due to the new NPA ordinance. Possible consolidation in the industry has also positively impacted their valuations.

Price (Rs) Increase over
3 months
PBR (x) P/E Cost to
income ratio
Net NPA (% of total assets)
SBI 290 25% 1.0 4.8 51% 5.6%
BOI 42 62% 0.8 2.8 50% 6.0%
BOB 79 72% 0.7 3.7 55% 5.6%
Corporation Bank 146 39% 0.7 4.3 32% 2.3%
Oriental Bank 62 51% 1.0 2.8 41% 3.2%
Latest available figures

Public sector banks on the other hand, have risen more than their private sector counterparts. In this case too, the new NPA ordinance has been the main driver for these counters. Also, the fact that these banks have more to gain from the NPA recovery drive (more NPA laden!). But apart from that, the technology initiatives are helping these banks reach efficiency levels at par with their private sector peers. This has also helped change the perception towards these banks considerably. Further, public sector banks that have been overstaffed for a long time now, have started offering VRS to their employees in order to become more streamlined. An example of these initiatives paying off is that of Corporation Bank. Cost to income ratio, which is one of the efficiency parameters with respect to banks, has improved to 32% for this bank in the December quarter compared to 37% in the same period a year ago. This is better than some of its private sector peers like Corporation Bank (45%) and IDBI Bank (48%). In that sense, the PSU banks have seen a re-rating among investors.

While the re-rating is an encouraging sign, investors may be well advised to remain invested in banks that have shown a good track record and have a definite plan in place. It is wise to stay out of banks that have remained obscure till recently, and have suddenly caught investor attention. The recent bullishness towards these counters have attracted speculators that have driven prices of all and sundry banks.

Yes, the banking sector does offer a good investment opportunity. The sector continues to perform well. But the trick is to research the stock well and find out which will be able to sustain in the competitive environment going forward. To analyse banking stocks better, read Banks: Look before you leap!

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