Stocks of the top five state-owned banks — State Bank of India (SBI), Punjab National Bank (PNB), Bank of India (BoI), Bank of Baroda (BoB) and Union Bank of India (UBI) — seem to have caught the fancy of investors since the market began the rally on March 9, as consistently strong operational performance begins to rub off on their share prices.
Stock prices have more than doubled in the past three months and crossed their highest levels in a year, outpacing the 76% rise in the benchmark Nifty of the National Stock Exchange (NSE).
The treatment being meted out to these stocks during the ongoing rally is in sharp contrast to their fate during the previous bull-run that lasted from June 2003 to May 2004. During that period, the Nifty rose by 50%, while the average change in stock prices of the five PSBs was only 30%.
This current upsurge is remarkable considering the fact that these stocks also held up much better than their private sector counterparts during the market meltdown earlier this year and last year. As a result, shareholders of government-owned banks have done much better than those of many private sector banks.
The upsurge in prices is backed by high growth reported by the five state-owned banks in FY09: their net profit grew by an average of 43% during the fiscal.
The top three private banks — ICICI Bank, HDFC Bank and Axis Bank — have also seen their stock prices soar. But this is not new for them, as they have been at the forefront of the bull run in the past years too.
The average price to earning multiple (P/E) of the top five PSBs is less than 10 times their trailing 12 months earnings. Typically, the P/E multiple tends to hover around the earnings growth.
State-owned banks always trade at a discount to their growth since they are not considered as efficient as their private sector counterparts.
However, the top five PSBs have shown remarkable consistency in their operations in the past three financial years. SBI, for instance, has seen its net profit grow by an average 29% per year since FY06, while it was 63% for BoI. It is clear that the gap between earnings growth and the P/E multiple is very wide and there are chances of more appreciation.
The same is not the case with private banks. Stocks of ICICI Bank and HDFC Bank are trading at P/E multiples of 22 and 27, respectively. It seems that their prices have adequately factored in performance.
Hot money now appears to be chasing the top five PSBs, as the chances of further appreciation are limited in private bank stocks.
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