SUNIL K KAJARIA 31.01.

2011
sunil.kajaria.wh93@wharton.upenn.edu

PUBLIC SECTOR BANKS – “LICENSE TO MINT”

In this study, we examine the growth rate in Adjusted Book Value (ABV) & the stock
price performance of 5 Public Sector Banks (PSBs) – Andhra Bank, Indian Overseas
Bank, Union Bank, IDBI Bank & Punjab National Bank for the period from 30th
September 2006 to 31st December 2010.

The sample includes representatives from across the PSB spectrum in terms of size. Most
of the banks are similar in the sense that they are primarily commercial banks with
lending activity at the core of operations. None of them have any large subsidiaries
engaged in activities like Insurance or Asset Management which would skew the
valuation profile. IDBI Bank’s large equity investment portfolio does present some
valuation issues but have been ignored for the purposes of this study.

1. STOCK MARKET RETURNS OVER THE PERIOD UNDER REVIEW

Despite the almost identical business models and business characteristics, stock-price
performance has been quite varied across the spectrum. Union Bank (up 242% since 30-
09-06), PNB (up 210%) and IDBI (up 171%) have out-performed the NIFTY (up 154%)
by a wide margin, whereas the smaller banks - IOB (up 119%) & Andhra Bank (up
146%) have underperformed the NIFTY during the period of review. What is striking is
that the performance has been consistent across the entire period of four years. As can be
seen in Figure 1.1, the various lines have minimum overlap, implying that the stock price
performance has been quite similar across time periods, and the winners (Union Bank &
PNB) have been consistent out-performers across the four years.
 FIG 1.1: RELATIVE STOCK-PERFORMANCE FROM 30-09-06 to 31-12-10

STOCK PRICE PERFORMANCE

APPRECIATION SINCE 30-09-06

300
250 Nifty
200 IOB
Andhra Bank
150
IDBI Bank
100 PNB
50 Union Bank

0
M -07
Se 07

M -08
Se 08

M -09
Se 09

M -10
Se 10
Ja 06

Ja 07

Ja 08

Ja 09

10
-

-
p-

p-

p-

p-

p-
ay

ay

ay

ay
n

n
Se

2. GROWTH IN ADJ. BOOK VALUE (ABV) OVER THE PERIOD UNDER REVIEW

ABV Growth for the Sample Banks has been all over the spectrum, with out-performance
shown by the Union Bank of India (up 228% since 30-09-06) and PNB (up 183%). IOB
(up 154%) and Andhra Bank (up 162%) are at the pack and IDBI is the clear laggard with
ABV being a mere 135% of the figure in 30-09-06.

FIG 2.1: Growth in Adjusted Book Value (ABV) from 30–09-06 to 31-12-10

GROWTH IN A.B.V
Appreciation over 30.09.06

250.00

200.00 IOB
150.00 Andhra Bank
IDBI Bank
100.00 PNB
50.00 Union Bank

0.00
May-07

May-08

May-09

May-10
Jan-07

Jan-08

Jan-09

Jan-10
Sep-06

Sep-07

Sep-08

Sep-09

Sep-10
Similar to stock-price performance, ABV growth lines too have minimum overlap,
implying that the winners (Union & PNB) have been consistent out-performers across the
4 year period. IOB is the sole exception, having had the second best growth AVB growth
up until 30-09-09 when growth rates plummeted. This period coincides with the sudden
spurt in NPAs from 2008-09 onwards and is likely the reason for the stock’s de-rating
and stock price underperformance

FIG 2.2 CAGR% Growth in ABV during the period from 30-09-06 to 31-12-10

25.00%

20.00%
CAGR -A.B.V.

15.00%

10.00%

5.00%

0.00%
IOB Andhra Bank IDBI Bank PNB Union Bank

Union Bank has shown a CAGR Growth of 20.06%, followed by PNB (14.38%), Andhra
Bank (11.30), IOB (10.00%) and finally IDBI (6.98%). Apart from IDBI, where poor
ABV growth has not mattered in terms of stock market returns, performance of the other
PSU banks seem closely co-related to growth in ABV.

There seems to a clear co-relation between stock-prices and growth in ABV as far as PSU
banks are concerned and investors can reasonably expect PSB stock prices to mirror
ABV performance over the long term.

3. PRICE / ABV BANDS FOR THE SAMPLE BANKS

A few observations become immediately clear upon studying the Price/ ABV bands for
the sample banks: 1) The higher quality banks (Union Bank & PNB) had higher &
tighter P/ABV bands as compared to their lower growth cousins. 2) Almost all the banks
hit their trough multiple in March 2009 and their peak multiple in Sept 07/ Dec 07. Thus,
stock prices of the sample banks are highly co-related and very much move in tandem
with another.
FIG 3.1: PRICE /ABV BANDS OVER THE PERIOD UNDER REVIEW

PRICE /ABV BANDS

3.00
2.50
IOB
2.00
Andhra Bank
1.50 IDBI Bank
1.00 PNB
Union Bank
0.50
0.00
M 07
Se 07

M 08

Se 08

M 09
Se 09

M 10

Se 10
Ja 6

Ja 7

Ja 8

Ja 9

10
-0

0
-

-
n-

n-

n-

n-
p-

p-

p-

p-
ay

ay

ay

ay
p
Se

As mentioned above, the bands for the better quality banks have the twin advantage of
being higher as well as tighter than their counterparts. This implies lower volatility of
stock prices across peak & trough valuations.

FIG 3.2: P/ABV BANDS FOR THE BANKS UNDER REVIEW

PRICE / ABV
LOW HIGH CURRENT MEAN
IOB 0.50 2.13 1.29 1.34
Andhra Bank 0.61 1.50 1.34 1.19
IDBI Bank 0.51 2.04 1.29 1.22
PNB 1.01 2.19 1.95 1.72
Union Bank 0.96 1.95 1.93 1.59

FIG 3.3 P/ ABV VARIANCE FROM MEAN FOR IOB DURING THE REVIEW PERIOD
IOB P/ABV variance

2.50
2.00
1.50 IOB
1.00 Mean
0.50

0.00
7

0
7

08

09

10
6

0
-0

-0

-0

-1
-0

-0

-0

-0

-1
0
n-

n-

n-

n-
ay

ay

ay

ay
p

ep

ep
Ja

Ja

Ja

Ja
Se

Se

Se
M

M
S

S
FIG 3.4 P/ ABV VARIANCE FROM MEAN FOR ANDHRA BANK DURING REVIEW PERIOD

ANDHRA BANK P/ABV VARIANCE

1.80
1.60
1.40
1.20
1.00 Andhra Bank
0.80 Mean
0.60
0.40
0.20
0.00
Jan-07

Jan-08

Jan-09

Jan-10
Sep-06

May-07

Sep-07

May-08

Sep-08

May-09

Sep-09

May-10

Sep-10
FIG 3.5 P/ABV VARIANCE FROM MEAN FOR IDBI BANK DURING REVIEW PERIOD

IDBI P/ABV VARIANCE

2.50

2.00

1.50 IDBI Bank

1.00 Mean

0.50

0.00
Jan-07

Jan-08

Jan-09

Jan-10
Sep-06

May-07

Sep-07

May-08

Sep-08

May-09

Sep-09

May-10

Sep-10

FIG 3.6 P/ABV VARIANCE FROM MEAN FOR PNB DURING REVIEW PERIOD

PNB P/ABV VARIANCE

3.00
2.50
2.00
PNB
1.50
Mean
1.00
0.50
0.00
M 7

M 8

0
6

0
7

0
-0

-0

-0

-0

-1
-0

-0

-0

-1
0
0

1
n-
n-

n-

n-
ep

ep

ep

ep

ep
ay

ay

ay

ay
Ja
Ja

Ja

Ja
M

M
S

S
FIG 3.7 P/ABV VARIANCE FROM MEAN FOR UNION BANK DURING REVIEW PERIOD

UNION BANK P/ABV VARIANCE

2.50

2.00

1.50 Union Bank

1.00 Mean

0.50

0.00
Jan-07

Jan-08

Jan-09

Jan-10
Sep-06

May-07

Sep-07

May-08

Sep-08

May-09

Sep-09

May-10

Sep-10
CONCLUSION

This exercise indicates that P/ABV seems to be a decent parameter for comparing
valuations of Indian PSU banks. Historically, this ratio has been in the 0.80 to 2.00 levels
for the sample banks in the study.

Particularly interesting is the fact that the higher quality banks (in terms of ABV growth)
possess higher and tighter P/ABV bands than their lower- growth counterparts. This has
serious implications for investors as it indicates the importance of curtailing and
controlling NPAs as a corporate strategy. Investors would be well advised to keep a tight
watch on the NPA figures while making and retaining investments in the PSU Banking
Space.

Investors should also exercise caution when P/ABV multiples move in excess of 2X as
such instances have sometimes led to sharp corrections and regression to much lower
multiples.