Banking stocks

Banking stocks quoting at two times book value can be great value buy :

 :7 Nov, 2011, 01.14PM IST  ET Bureau

                                                                                                                                           

• Bank stocks have been at the receiving end in the stock market for some time now. Bank Nifty, the sectoral benchmark for the banking sector, has lost around 23.7% in the past year. In comparison, S&P CNX Nifty, the index representing the broad market, has posted a loss of only 15.88% in the same period. 

• Valuations of the banking sector have also taken a beating. The banking index was quoting at 2.77 times its trailing 12 months book value a year ago. Now it is quoting at 2.21 times. The price-to-book-value ratio is calculated by dividing the closing price of the stock by the latest quarter's book value per share. Generally, lower the price-to-book-value multiple, lower the valuations of the stock. According to pundits, lower valuations provide a great entry point into stocks. So, does that mean bank stocks are now a great value buy? 

• "Valuations in the banking space are attractive now. Private banks are quoting around two times their book value, compared with about three times in the past, and large private sector banks, which were quoting at 1.5 to 2 times are now quoting around one time the book value per share," says Rikesh Parikh, vice-president - equities, Motilal Oswal Securities. It means the banking stocks are quoting below their historical valuations and they make good case for investments. 

• "If interest rates start moving down after March 2012, the stress in the system will come down drastically. The demand for credit will go up and the changing sentiment and increased economic activity will boost banking business. These factors will ultimately reward investors in banking stocks," says Parikh. 

• Rising interest rates have been smothering the banking sector for a while, as RBI has been tightening the monetary policy to rein in inflation. "High interest rates have lead to lower demand for money, hitting the profits of banks," says Dipen Shah, head - fundamental research, Kotak Securities. It has also resulted in deterioration of the quality of assets owned by banks. "Rising interest rates lead to an increase in non-performing assets, especially from low-margin businesses such as metals and textiles, which necessitate higher provisioning by banks," says Sailav Kaji, director - institutional equities & chief strategist, Padmakshi Financial Services.