Banking stocks: P/E ratio drops to four-year low

A sharp fall in banking stocks has seen the average price-to-earnings (P/E) ratio, an indicator of market valuations, of S&P BSE Bankex dip to over four-year-low of 9.53, indicating that investors are willing to pay much less for banking shares at present.

Most of the frontline banking stocks has fallen like nine pins after the recent measures taken by the Reserve Bank of India (RBI) to tighten liquidity to stabilise the Indian rupee. The BSE banking share index, Bankex, has tanked nearly 23% since July 15, as compared to 9.2% fall in benchmark S&P BSE Sensex.

Most of the frontline counters are trading at multi-years low on BSE. The list includes State Bank of India, Bank of Baroda, Bank of India, ICICI Bank, HDFC Bank, Punjab National Bank among others.

P/E ratio a valuation ratio of a company's current share price compared to its per-share earnings.

The P/E ratio has fallen across the board with both private as well as public sector banks taking a hit due to negative investor sentiment. The current P/E ratio of 9.53, also lowest since May 2009, is in stark contrast to its peak of 13.39 which was set on May 20 this year. It's touched a historic high of 26.23 in January 14, 2008.

The combined P/E ratio of the 30 shares that make up the Bombay Stock Exchange Sensitive Index currently stands at 16.84.

In simple terms, these low P/E ratio figures shows that an investor who was willing to pay Rs 12-13 for every rupee an individual share earned a two month ago, is willing to pay less than Rs 10 for the same rupee-earning now.

According to analysis of 41 public and private sector banks, nearly half, or 20 stocks, trading at P/E ratio less than 5 and 15 stocks having P/E ratio in the range of 5-10 times.

Name	July 15,13	Aug 19,13	% fall	P/E ratio
YES Bank	500.50	241.35	-51.78	7.14
Syndicate Bank	119.25	64.05	-46.29	1.89
Canara Bank	361.10	210.15	-41.80	3.46
Union Bank of India	180.30	108.95	-39.57	3.25
Dena Bank	71.40	44.60	-37.54	2.12
Indian Bank	110.25	70.15	-36.37	1.97
Oriental Bank	201.20	129.00	-35.88	2.93
Karnataka Bank	112.65	74.10	-34.22	3.88
Andhra Bank	82.55	54.55	-33.92	2.54
Bank of India	231.80	154.30	-33.43	3.57
Price on BSE in Rs
Source : CapitalinePlus