Price to book value of banks takes a knock

Written by Pradip Kumar Dey | Mumbai, Aug 11 | Updated: Aug 12 2008, 06:26am hrs
High interest rates, volatile bond prices and an equally volatile stock market have seen a hammering in bank stocks. Analysts are now of the opinion that these frequent plunges could actually create value picking opportunities and this is reflected in the falling price to book value ratios.

Valuations are beginning to look very attractive from a long-term perspective. At current levels, a basket of banks would afford relatively less risk to deteriorating sector fundamentals, says a report by Enam India Research.

The average book value of 21 PSBs have increased by 16.3% from Rs 171.81 on August 1, 2007 to Rs199.82 on August 1, 2008.And their average price has decreased from Rs 290.82 in 2007 to Rs 248.44 on August, 2008.The average price book value ratio of 21 PSBs decreased from 1.69 times to 1.24 times.

In the case of private banks, the price to book value ratio at the aggregate level also showed a decline over the year as they bore the maximum brunt of the price hammerings. However, private sector banks tend to get a higher valuation, when compared to the government owned banks. The price/book value ratio was higher in private banks compared to PSBs during both the time period.

This ratio has gained in popularity in recent years in the banking industry. Most bank assets, such as commercial accounts and loans,are valued equal to book value.

Among the PSBs, the highest decrease in price/book value ratio was seen in the case of Indian Bank (1.90 to 0.98) followed by State Bank of B&J(1.68 to 0.90) and State Bank of Travancore (1.72 to 0.93).

Private banks,on the other hand, saw a 25.5% growth in book value during last one year. The average price of 17 private banks has decreased from Rs 339.32 on August 1, 2007 to Rs 294.50 on August 1, 2008. So the average price/book value ratio of 17 private banks decreased from 2.68 times to 1.85 times.