Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

How high are bank valuations?

It's likely that private sector bank valuations are elevated because they continue to grab market share from public sector banks in terms of loan growth

The chart shows a clutch of private and public sector banks and compares their current price-to-book multiples with the average during the 2004-07 boom period.

Note that most of the private sector banks are trading at price-to-book (one-year forward) multiples that are higher than in 2004-07, although the state of the economy now is much worse and a recovery seems painfully slow. It’s likely that private sector bank valuations are elevated because they continue to grab market share from public sector banks in terms of loan growth, although gross bad loans have been rising for some private sector lenders like Axis Bank Ltd and ICICI Bank Ltd as of the June quarter.

What is surprising is that public sector banks such as State Bank of India and Bank of Baroda too are trading at a premium to their average valuations during the 2004-07 period, despite the well-known problems that public sector lenders have with stressed assets. But Punjab National Bank, Bank of India and Union Bank of India are priced at a substantial discount to their valuations during the last boom. The chart says it all.

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