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Last week’s poll: Our view - Views on News from Equitymaster
 
 
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  • Jun 23, 2003

    Last week’s poll: Our view

    The banking stocks, as we all know, have had a dream run on the bourses. It is the PSU banks that have been rediscovered. As always happens post a brilliant bull run, there are concerns of the exuberance being overplayed. To know what our viewers though about the issue, we posed a question last week: ‘’Do you find value in banking stocks?’’

    The response…
    The response one would have thought would be a resounding ‘No’. Instead the vote was mixed. Though 53% of respondents stated that they did not find banking stocks attractive at these valuations, a significant 44% voted in favour of banking stocks. The reason for this mixed response in not hard to guess.

    While banking stocks, especially PSUs, have had a dream run in the past six months, valuations of most of these banks are perceived to be lagging behind their private sector peers. But this is not without reason. Agreed that PSU banks have a lot going for them. The passing of the NPA ordinance bill, the large distribution network of these banks, their stride towards technology as well as unrealised gains on G-Sec portfolio have all been key positives for the sector. The benefits of many of these positives are yet to be realised. But then, isn’t all this now in the price?

    Our view…
    Take a look at the valuation tables for some key PSU and private sector banks. Except for HDFC Bank, which trades at a premium both in terms of P/E and price to book value, all other banks (be it private or PSUs) are more or less trading at similar valuations. Though PSUs have obvious advantage of size, private banks are much more profitable, with cleaner books (read lower NPAs), professional management and are growing aggressively. So, in a sense, both have their own positives and negatives.

      Price (Rs) % gains over 1 year 52 wk H/L FY03 EPS (Rs) P/E (x) P/BV (x)
    Private banks
    HDFC Bank 248 13.8% 266 / 187 13.7 18.1 3.1
    IDBI Bank 26 -19.6% 36 / 18 5.1 5.1 1.3
    ICICI Bank 142 -1.6% 158 / 109 19.7 7.2 1.9
    UTI Bank 50 26.8% 56 / 33 8.3 6.0 1.5
    PSU banks
    BOB 114 75.3% 141 / 44 26.3 4.3 0.8*
    BOI 50 45.5% 58 / 25 17.4 2.9 2.2
    Corp. Bank 165 44.9% 184 / 97 29.0 5.7 1.0
    OBC 138 200.0% 155 / 39 23.7 5.8 1.4
    PNB 156 223.7% 196 / 40 31.8 4.9 1.1*
    SBI 359 47.9% 368 / 221 59.0 6.1 1.1

    * Not adjusted for NPAs

    In our view, the Indian banking sector still has a lot of steam left. But by steam, we mean that the sector has yet to see consolidation benefits and the retail segment is likely to grow at a faster pace. That is good news for the sector. But on the valuations front, we believe a lot of this potential is already in the price. What we are saying here is that like in every rally, even the laggards get a good valuation on a sector’s upturn. Though the banking sector in India has immense potential for growth, not every player is geared to take advantage of this profitably. It is better to stick with quality, be it public sector or private sector, to take advantage of this potential.

     

     

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