Mumbai: Financial stocks across the globe, among the worst hit by the slump in equity markets during the past year, rallied this week after the US government bailed out mortgage firms Freddie Mac and Fannie Mae to help contain losses in the US housing market, the cradle of the global credit contagion.
A Mint analysis of global financial stocks indicates that valuations of Indian firms have witnessed more erosion than their global peers even though local companies are relatively less exposed to the impact of the US credit crisis.
While 42 banking and financial services stocks traded on the Bombay Stock Exchange, or BSE, have lost about 50% on average, the top 37 financial stocks traded across markets around the world have dropped 47% on average, from their 52-week high to the closing price on 5 September.
Some of India’s largest brokerage and other non-banking stocks have suffered the biggest value erosion. Indiabulls Securities Ltd and Indiabulls Financial Services Ltd have lost 80% and 76%, respectively. Three brokerages, Motilal Oswal Financial Services Ltd, Edelweiss Capital Ltd and India Infoline Ltd follow the ranks of highest value erosion.
Among global financial stocks, the worst affected are Freddie and Fannie. This analysis is based on stock prices on 5 September. Since then, both have lost heavily and are now penny stocks.
Apart from the mortgage firms, investment bank Lehman Brothers Holdings Inc. saw the highest value erosion, more than 70%, followed by American International Group Inc., Wachovia Corp. and Merrill Lynch and Co.
Three international banking and financial services group stocks—Fortis SA, Citigroup Inc. and UBS AG—have also dropped more than 60% from their 52-week high.
Among Indian banks, the worst affected were Bank of Maharashtra, Vijaya Bank, Indian Overseas Bank and Kotak Mahindra Bank Ltd, each down more than 50%.
According to analysts, Indian bank stocks continue to remain oversold, even after their recent rally. “India is a fertile banking growth market,” said Saurabh Mukherjee, head of India equities for UK-based investment bank and equity research house Noble Group.
It is ironic that many Indian bank stocks are now available below their book value, considering the superior fundamentals of these firms compared with western financial institutions, he said.
The sharp drop in global commodity prices, which is expected to lower inflation worries in India and across Asia, has already brought back investor demand for stocks of local lenders. “Banks are already our favourite sector,” said Mark Mathews, strategist at Merrill Lynch (Hong Kong), in his latest research report.
Mathews recommends ICICI Bank Ltd and Bank of India Ltd, among other Asian banks. ICICI Bank stock is down 54%, while Bank of India is down 39% from their year-high levels.
Stocks of only two Indian banks, HDFC Bank Ltd and Punjab National Bank Ltd, fell less than the benchmark Sensex index, which has dropped more than 30% from its 52-week high. Housing Development Finance Corp. Ltd, India’s oldest mortgage player, also lost less than the Sensex.
Analysts are also expecting a brighter outlook on equity markets to emerge by the end of this year, which could improve fortunes of brokerage stocks.