VR Logo

In a Dark Corner

Public sector banks (PSBs) are all trading below their book value led us to further examine the banking sector

The fact that listed public sector banks (PSBs) are all trading below their book value led us to further examine the banking sector, dividing it into two – private and public. Limiting ourselves to top-5 banks in both sectors, we analysed their net interest, earnings and market capitalisation.

Observing the total net interest, PSBs earned twice than that of private banks and still booked a profit of Rs 33,694 crore. But one look at the market cap and it’s evident that PSBs are trading at almost half of their private sector counterparts.

We started digging deeper to evaluate other aspects of the banking sector such as the book value, dividend yield to realise that there can only be two reasons for such discount -- the asset quality and growth rate of the loan book. But the question remains that are these factors too strong to penalise the public sector banks up to this extend?

The table shows the average growth in book value per share over the past five years and the situation is not that grave in the public sector. But in case of asset quality, PSBs are laggards with an average net non performing asset of 1.99 per cent as compared to 0.46 per cent of the private sector. The efficiency ratios, net interest margin and yield on advances are low for PSBs but that is already factored into the profitability that we compared in the first table.

Dividend Yield (%)

The outcome is that it's only the asset quality which is keeping the PSBs priced so low. But the analysis leaves with an opinion that PSBs have been treated too harshly by the market. Some banks have dividend yield near to that of risk-free interest and it makes it more attractive as dividends are tax free into the hands of the investors.

The large scale of dividend yield due to low prices shows to a certain extent the market's perception towards the public sector banks. Obviously, not all the banks in the list above should be considered for investment purpose. However, our list of High Dividend Yield from the Stock Ideas section of Wealth Insight's September issue, which is dominant by the banking sector, can be a very good initiative to begin you own research.

All data as on August 16, 2013.