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Valuation gap between public sector and private banks narrows

Price-to-book value ratio of state-owned banks jumped from 0.9x to 1.15x in a day, while private banks traded lower at 3.42x

Krishna Kant  |  Mumbai 

BSE Sensex
Staff celebrate as the BSE Sensex breached 33,000 in Mumbai on Wednesday | Photo: Kamlesh Pednekar

The rally in public sector bank (PSB) stocks after the announcement of the government’s recapitalisation plan have narrowed their valuation gap with  

Earlier, a typical private bank was nearly four times as expensive as a PSB on average, the gap is now down to 3x. added Rs 1.19 lakh crore to their combined on Wednesday, taking it past their book value in 2016-17. In contrast, saw a marginal dip in their market capitalisation, led by HDFC Bank.

are now trading at 1.15 times their book value or net worth per share during 2016-17 on average, up from a valuation multiple of 0.9x on Tuesday. In comparison, the private banks' declined marginally to 3.42x their book value from 3.45x.

Analysts said this would enable to raise from the market and help them grow faster. “had almost stopped making fresh loans due to lack of equity support from the government and their inability to raise incremental from the market. A part of this problem has now eased after the recapitalisation announcement by the government and a consequent rally in their share prices,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

Historically, have traded at a discount to their private sector peers, however, the gap widened to a record high in the last few quarters due to the former’s inability to expand their business due to mounting losses from bad loans and inadequate equity support from the government.

The combined of 22 listed jumped to Rs 5.48 lakh crore on Wednesday, up from Rs 4.29 lakh crore the previous day. In comparison, their combined net worth was Rs 4.77 lakh crore at the end of March.

The combined of 16 listed declined marginally to Rs 12.4 lakh crore on Wednesday, from Rs 12.5 lakh crore a day before. Against this, had a combined net worth of Rs 3.62 lakh crore at the end of 2016-17.

Seven were trading at a premium to their book value on Wednesday against just two a day earlier. Some of the that crossed the valuation threshold on Wednesday were Punjab National Bank, Bank of Baroda, IDBI Bank, Indian Bank and Vijaya Bank.

Punjab National Bank was the single biggest gainer as its stock price surged by 46 per cent, adding nearly Rs 14,000 crore to its Other big gainers were Canara Bank (38 per cent) and Union Bank of India, Bank of India and Bank of Baroda, which gained between 30 per cent and 35 per cent in Wednesday’s trade.

Experts, however, question the sustainability of this sharp rally. “will now have to show faster growth in their net interest income and profitability in the coming months to justify the current rally. This looks tough in the near term given that bulk of the incremental capital infusion is likely to be used to compensate their losses on account of bad loans rather than to make incremental lending,” said Dhananjay Sinha, head of research at Emkay Global Financial Services.

The stocks could also come under pressure due to poor results in the current quarter and the next. “I expect a correction in in due course. Their results for the September quarter are likely to be bad and it could be the same for the December quarter. Things will look up only from the March quarter,” said Chokkalingam.


First Published: Thu, October 26 2017. 00:19 IST