With share prices at a discount to the PSU Bank book values, these shares are generating a lot of buzz. Every time one thinks that the mess is clear now, new skeletons fall off the closet. Experts have been calling the bottom for PSU Banks from quite sometime now. Many are citing the huge discounts at which PSU Banks trade to their book values viz-a-viz their private sector peers.
We had written about investing in PSU Banks last year: Should you invest in PSU Banks
The recent scams and defaults have further sent the PSU Bank shares spiraling lower and investors see a good opportunity to buy into PSU Banks. Does it necessarily mean that PSU Banks are a valuepick because they are trading at deep discounts to their book values? This article addresses this point through historical facts and figures.
|Courtesy: The Economic Times
Understanding PSU Bank book values
PSU Bank book values are reported by the management. It may or may not be a true reflection of the books because if the figures in the balance sheet and revenue statement are incorrect then the book value is incorrect too! So why will figures be incorrect?
Incorrect figures can be because of management misstating facts and figures, not accounting for losses and bad debts, assets being carried in the balance sheet even when they are obsolete.
The loans that banks give are assets for them. So when the value of this asset erodes, the book value falls. As the banks start reporting NPA’s, the PSU Bank book values erode (due to write of off assets).
While the book value is determined from the numbers reported by the companies, the premium that investors pay on this book value is determined from their perception of the asset quality. Strong balance sheets and a capacity to earn higher ROE’s results in investors paying high premiums over the book value. The below table shows the premium that investors pay for different companies:
It is interesting to note that for Eicher Motors, the market is paying nearly 11x the book value per share and for Corporation Bank, the market is paying just 0.37x of the book value!
So are PSU Banks cheap/under-valued?
First, lets look at the historical PB Ratios for these banks.
|10 Year PB Ratio Chart|
From 2011, Corporation bank has always traded below its book value. That means, investors were never ready to pay even the book value of the company!
|Andhra Bank’s PB Ratio|
|PNB’s premium has nose-dived|
PNB was one PSU bank which along with SBI used to trade at ~ 1x the book value. The 12,000 Crore Nirav Modi case has led to a sharp re-rating of the stock as investors fear that the book value is massively over-stated.