Picking those with the least holes

The PNB-fraud has dimmed investor perception about PSU banks, but selective bottom-fishing continues in SBI and Bank of Baroda

The Rs.12,968-crore-fraud at PNB has once again highlighted the frailty of PSU banks’ risk-management systems. The banking system is already creaking under the weight of NPAs of Rs.730,000 crore and panicked investors lost no time in pronouncing their verdict. The stock price of PNB has corrected 33% and the Nifty PSU Bank Index has also fallen 11% in wake of the scam. Among large PSU banks, SBI has corrected 12.6%, while Bank of Baroda is down 14.7%. After the pounding, most PSU banks now trade at 10-30% discount to their book value (see: Ragtag bunch). However, Abhimanyu Sofat, VP – research, IIFL, says that the current beaten valuations are not what one should be looking at as the quality of the book itself remains uncertain. “RBI, through its new norms, is pushing banks to quickly recognise stress in their books, via a resolution plan or by referring the stressed no-resolution accounts for bankruptcy proceedings. Even though some PSU banks are trading at half their book value, it is difficult to guess how the books will look in light of the new NPA norms,” he adds.

Analysts at the Tokyo-based financial services company Nomura though argue that the current valuation of some of the PSU banks are much lower than their sum-of-the-parts value, which takes into account the value of their non-core businesses. A sensitivity analysis done by Nomura shows that even if PNB writes off Rs.13,000 crore worth of loans on account of the Nirav Modi fraud, the bank’s sum of the part (SOTP) value is Rs.168 per share (which includes the value of its subsidiaries and its FY20 book value). At Rs.98 per share, the bank is currently trading at 40% discount to its SOTP value and at 27% discount to the bank’s FY20 adjusted book value of Rs.134 per share (see: Value or trap).

However, there is no sign of the broad-based positive sentiment that PSU banks glowed in after the government announced a Rs.2.1 lakh crore recapitalisation package last year on October 24. The Nifty PSU Bank Index gained as much as 21% the following day but is now trading even below the pre-recapitalisation level. “PSU banks were trading at low valuations and the mood was upbeat as resolution capital was being made available, but a large PSU bank like PNB getting hit with


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