Banking stocks' P/E at four-year low

Majority of analysts sees further downsides in valuations, especially for state-owned lenders

A sharp fall in banking stocks since July 15 has seen the average price-to-earnings (P/E) ratio, an indicator of market valuations, of the S&P BSE Bankex dip to a four-year-low of 9.31. This suggests investors are now willing to pay much less for these stocks.

Most of the frontline banking stocks have fallen like ninepins in the recent market turmoil. These now trade at multi-year low, after the Reserve Bank of India announced liquidity tightening measures in July, amid a sliding rupee.

The P/E ratio has fallen across the board, with both private and public sector banks taking a hit due to negative investor sentiment. The current P/E ratio of 9.31, lowest since May 2009, is in stark contrast to its recent peak of 13.39, set on May 20 this year. It touched a historic high of 26.23 on January 14, 2008, shows BSE data.

The BSE banking share index, Bankex, has tanked nearly 22 per cent since July 15. This compares to a 10.6 per cent fall in the benchmark S&P BSE Sensex. State Bank of India, Bank of Baroda, Bank of India, ICICI Bank, HDFC Bank and Punjab National Bank are some of the stocks in this space around their 52-week lows on the BSE.

The BSE Bankex trades at a price to book value (P/B) multiple of 1.59 times, its lowest level since May 15, 2009.

“Valuations for public sector banks (PSBs) have come off by a big margin after the steep correction in the last three months. With tighter liquidity, we prefer non-banking finance companies with some pricing power but will wait for better valuations,” say Adarsh Parasrampuria and Pritesh Bumb of Prabhudas Lilladher in an August 19 report.

According to analysis of 41 public and private sector banks, 20 traded at a P/E ratio less than 5, with 15 stocks having a P/E ratio in the range of five to 10 times. The combined P/E ratio of the 30 shares that make up the BSE Sensitive Index is currently at 16.15.

Worsening financial scenarios, credit conditions and the rising burden of structural adjustments are likely to diminish the prospects of recovery in the short to medium term, analysts say.

“Overall, we believe, the elevated level of current account deficit, despite very weak domestic demand exposes India to significant currency vulnerability in the context of the US Fed tapering scenario. Our underweight view on banking has strengthened, as we continue to see a further downside in valuation, particularly for PSBs,” Dhananjay Sinha, head of institutional research at Emkay Global Financial Services, had said in a recent report.

“The FY92 experience suggests the credit slowdown could be significantly more prolonged than the deposit slowdown. A prolonged slowdown in credit growth would put pressure on the cost/income ratios of banks with an inflexible cost base (PSBs) and those that are seeing strong growth of operating costs, due to network investments (YES and IndusInd). HDFC Bank and Kotak Mahindra Bank remain our top picks,” say analysts at Barclays Research.

However, Hatim Broachwala, an analyst with Karvy Stock Broking, maintains a bullish view. “We continue to reiterate our bullish stand on the banking sector, even more after the concern of reversal in interest rate trends has eased. Even heightened concern among market participants on increase in slippages on account of an increase in interest rates should ease. Although the concern on account of rupee depreciation and consequent impact on corporates remain, we still remain positive on the banking sector, as the current valuation multiples are close to cyclical lows of FY09-10,” he said.