Cheap valuations of public sector banks: Buy or no buy?

PSBs) are trading at a discount to its private sector peers. PSBs are presently trading at a 12-month Forward Price-to-Book Value (P/BV) of less than 1 compared to an average P/BV multiple of 2 for Private Sector Banks. This valuation gap is unlikely to be bridged in the coming quarters due to higher exposure of PSBs in stressed sectors.

Public sector banks have high exposure to sectors like iron, steel, agriculture, textile, etc which has resulted in higher gross non-performing assets (GNPA). As a result, Private sector banks have a relatively better asset quality. In addition, the rise in impaired assets - GNPA + restructured loans as a percentage of total loans for PSBs has increased by about 90 basis points.

In comparison to this, private banks have seen only a 27 basis points rise quarter-on-quarter basis. It is believed that Public Sector Banks may see further asset deterioration in terms of slippages and build-up of restructuring pipeline.

Besides, loan growth for FY13/FY14 should be muted given lower investment activity and subdued consumer demand. Hence, it is unlikely that the valuations of PSBs will inch up further in the coming quarters. However, with the reduction in interest rates, PSBs may see a lower number of impaired assets in the coming months.