Steps taken by the Reserve Bank of India (RBI) to clean up the books of public sector banks coupled with expectations of a strong monsoon and the passage of the bankruptcy law have helped to improve the valuation of public sector lenders.
Steps taken by the Reserve Bank of India (RBI) to clean up the books of public sector banks coupled with expectations of a strong monsoon and the passage of the bankruptcy law have helped to improve the valuation of public sector lenders. The NSE Nifty PSU Bank Index, which tracks 12 state-controlled lenders, rallied 15.3% since March 2016 expanding the price to book value (P/BV) — of the index from 0.61 times to 0.72 times during the same period. The ratio had hit as low as 0.49 times in mid February.
The book value indicates the amount of net asset that each share of common stock represents on the balance sheet. State Bank of India, the nation’s largest lender by assets, advanced 15%, taking its P/BV close to one from 0.84 times clocked at the end of March. Shares of Bank of Baroda gained 8.5%, while Punjab National Bank rose 34.5%. Though every single PSBs, including the State Bank of India (SBI), trades at below its book value, the improvement in the ratio was seen in all state lenders barring Chennai based Indian Overseas Bank, which saw a decline in the ratio as the bank’s share slid 7.8% during the same period.
“Good monsoon has given a hope in the revival in the rural demand that will usher credit off take, especially for public sector lenders. Also, the passage of the Bankruptcy Code in Parliament has revived investor sentiments that the new law will ease rising bad loans”. Said Prabhakar AK, head of research, IDBI Capital.
The reserve bank’s recent move, Scheme for Sustainable Structuring of Stressed Assets (S4A) aimed at easing the amount of troubled loans on bank balance sheets and giving some respite to companies struggling with repayment also weighed on the investors inclination towards these stocks.
Among the Index constituents, shares of Allahabad Bank rallied the most with nearly 40% gain, followed by Punjab National Bank (up 34.5%) and Oriental Bank of Commerce (up 29%)
Shares of Union Bank of India, IDBI Bank, Bank of India, Syndicate Bank and Andhra Bank rallied anywhere between 2.9% to 17.7% while shares of Canara Bank gained 20.1%
The surge in share prices witnessed by PSBs has swelled their combined market capitalisation by Rs 61,391 crore to Rs 3.72 lakh crore in the last three months.