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Of Surge in PSU Bank Stocks and Key Stocks in Action Today
Thu, 31 May Pre-Open

The NSE PSU Bank index has gained 3.5% from the beginning of May 2018. Having said that, these gains is nowhere close to the 30% surge in the index as witnessed on 25th October 2017-the date when bank recapitalization of Rs 2.1 trillion was announced. God bless the investors who bought the public-sector banks on this date. Fast forward to 30th May and investors would have lost massive net worth in these stocks.

Loss in Market Capitalization of PSU Banks from 26th October 2017 to 30th May 2018
BankPrice as on 26th October 2017Price as on 30th May 2018Loss in Market Cap (in %)Current Price/ Book Value (New)
Punjab National Bank21386-60%0.5
Union Bank of India18690-52%0.4
Allahabad Bank8442-51%0.4
Andhra Bank7037-48%0.3
Syndicate Bank8249-40%0.4
Bank of India193100-48%0.5
Bank of Baroda185139-25%0.8
SBI Bank321267-17%1.1
Source: ACE Equity

The healthy correction has led to these banks trading at attractive valuations. All the banks as mentioned in this table are trading below their ten-year median price/book value.

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Now, there is a term in investing called Value Traps. Value traps are stocks that are trading at very cheap valuations. These stocks can trade cheap forever and never really recover in terms of stock price performance. There is a reason for this. And the reason is related to structural problems with the company.

The structural problem with public sector banks is the credit appraisal policy. In the greed of balance sheet growth and pressure from government, these banks have lent to stressed sectors such as power and iron & steel. The result- Gross Non-Performing Assets (GNPA's) of public sector bank have shot up to 11.03% in FY17 as compared to 4.97% in FY15.

Unless such structural problems are resolved it is highly likely that some of these banks act as a value trap and continue to deliver miserable stock returns in the long run.

Top Stocks in Action Today

The stock of Manpasand Bevarages, Vedanta, Indian Oil Corporation, Everready Industries are expected to be in the news today.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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