It's raining discounts, but it's certainly not a good time to shop. Almost all public sector banks are trading at deep discounts to their book values, unlike most private banks that are trading significantly higher to their book values. Out of the 24 listed public sector banks State Bank of India is the only exception. On the contrary, only 33 per cent private bank stocks are trading below their book value.
Book value is an important financial measure, which represents the part of accounting value of business that would be left for shareholders if the company were to immediately liquidate, sell all of its assets and pay off its liabilities.
There could be several reasons as to why a stock trades below its book value, the foremost being lack of investor confidence in the company's prospects or its deteriorating performance. Usually, it's never a healthy sign for a stock to trade below its intrinsic or book value. Public sector banks are struggling with their asset qualities and their gross stressed assets are over 10 per cent. According to Nitin Kumar, Associate Vice President, Prabhudas Liladher: "Public sector banks have been under stress for a long time given their asset quality issues, low balance sheet and margins growth."
The public sector banks have not been able to maintain their balance sheet growth unlike private sector banks . This is sending distressed signals in the markets and investors are losing confidence. "Private sector banks are able to grow their balance sheet at around 15-18 per cent, whereas the public sector banks are struggling at a balance sheet growth of around 5 per cent. The gross non-performing asset levels of public sector banks are in the range of 5-6 per cent, which is much lower in case of private sector banks," Kumar adds.
For investors, it may not be the best time to invest in public sector banks as pressures on their margins are expected to continue. "Banks are expected to face asset quality issues, however, moving forward, some respite could be there in terms of bad loans," adds Kumar.