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Banking: Valuation comparison

Feb 9, 2001

Banking stocks witnessed a smart run-up in the past few days. The rally was mainly fueled by the recent consolidation activity in the sector. Several operational clean-ups such as VRS and aggressive NPA recovery by nationalised banks also contributed to the upbeat sentiment of the banking stocks. Also, the hope that the RBI will cut interest rates has kept the buying interest intact in the sector.Private sector banking stocks attracts comparatively higher valuations than nationalised banks due to good quality of their assets, efficient operations, use of latest technology apart from several value added services provided by them. Further, relatively fast decision-making process puts them one step ahead of public sector banks.

Comparative Domestic Valuations
ParticularsUTI Global BankICICI Bank HDFC BankSBICorporation Bank
P/E 6.2 21.5 30.1 6.2 4.9
Price/Book Value 1.6 2.4 6.9 0.9 1.0
Market Cap/Revenues 0.9 2.2 4.6 0.5 0.7
Key Ratios
OPM19.3%28.9%41.7%31.9%30.5%
NPM14.4%10.5%15.2%8.4%14.5%
ROE25.8%13.0%31.3%15.2%20.0%
*Valuations after the merger
** Valuations on FY01 projected earnings

Merger mania in the banking industry is gaining rapidly with one more major merger between UTI Bank and Global Trust Bank. This will be the largest private sector bank in terms of assets, deposits and profits. In terms of branch network the merged ICICI Bank and Bank of Madura (BOM) will be the largest. The total number of branches of Bank Madura and ICICI put together is around 351 whereas UTI Global has 157 branches. However, compared to the merger between ICICI Bank and BOM, UTI Global Bank will not face many problems as there are no trade unions to contend with and the technology platforms are very similar.

Some of the premier nationalised banks are also in the limelight on the back of their announcement of enhancing employee productivity and returns on equity through voluntary retirement scheme. For example, in case of State Bank of India (SBI), the VRS scheme is expected to improve its ROE to around 19% in the year FY02 and FY03 (FY00-17%).

Comparative International Valuations
ParticularsBank of East Asia
(Hong Kong)

Abbey National
Plc (London)

HSBC Holdings
(London)

The Fuji
Bank (Japan)

Bank of
Ireland

The Bank of
New York

Bank of
America

P/E 16.5 13.8 21.1 38.4 12.6 28.011.9
Price/Book Value 1.8 2.4 3.7 1.4 0.9 6.5 1.9
Market Cap/Revenues 2.8 1.5 3.7 0.9 2.0 19.6 2.0
Key Ratios
OPM35.8%24.5%38.3%57.7%35.6%42.6%42.8%
NPM18.2%11.9%22.6%4.9%18.6%35.2%19.1%
ROE11.1%19.3%18.7%4.0%8.5%25.6%16.5%

Lets compare the valuations of Indian Banks with banks in the global markets. Internationally, banks such as HSBC Holding and Bank of New York are valued at premium by the markets. These banks have best profit margins and relatively high returns on equity. Further, services offered by them coupled with cutting edge technology have put them ahead of other regional banks. If the Indian banks are successfully able to improve the quality of services provided by them with good quality of assets, they could attract higher valuations in line with the other global banks.

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