For the year so far, the top three PSBs — SBI, PNB and BoB — have emerged as the best-performing banking stocks, with gains ranging anywhere between 56% and 67%. Not surprisingly, these stocks have pared the discount with which they are trading to their long-term average valuations. Both, SBI and BoB currently change hands at a trailing 12-month price to book value of 1.5 and 1.2, very close to the historical average P/BV ratios. While PNB has also recorded YTD gains of 56%, it maintains a significant discount to its historical valuations, given that the bank is still struggling with asset quality concerns.
Recently, BofA ML cited SBI among the contrarian trades based on the ownership trends, pointing out the fact that FII ownership in the stock, unlike some of the larger private sector banks, is significantly below the previous cyclical peaks. As per Capitaline, FIIs own 11.2% stake in SBI as against HDFC Bank, ICICI Bank (41.1%), Federal Bank (37.6%) and Kotak Mahindra Bank (34.6%).
This rationale could intensify buying interest in SBI, the sharp YTD rally notwithstanding, given that the India’s largest bank is reporting steady improvements in earnings. Besides a strong y-o-y earnings growth of 31%, for the three months ended September 2014, SBI witnessed a fifth consecutive quarter of decline in fresh impairments, including slippages and fresh restructuring.
Even as analysts acknowledged a turnaround at SBI — with two ratings upgrade and multiple upward revisions to the price target after the Q2 results — they largely remain cautious on the PSB pack as a whole. Besides a slower growth in their net interest income (NIIs) compared to private sector banks, asset quality concerns continue to limit interest in these stocks most of which currently trade 20% to 50% below their historical valuations.
Meanwhile, private sector banks have restored the higher premium they generally maintain with their historical averages; HDFC Bank, Kotak Mahhindra Bank and ICICI Bank currently boast a P/BV ratio of 5, 4.4 and 2.6, more than two times the valuations commanded by global banks like Citigroup, Bank of America and JPMorgan Chase.