It is widely acknowledged that the Price to Book Value per share (P/B) Ratio holds more significance in the valuation of banks and financial companies compared to the Price to Earnings per share (P/E) Ratio. This indicates that Book Value serves as a more dependable indicator than earnings in assessing the financial well-being of banking and finance entities. Consequently, analyzing the Balance Sheet becomes imperative in this context to gain insights into the efficiency of asset utilization and the management of spreads and credit quality. The calculation of Book Value involves deducting the accumulated depreciation from the initial purchase cost of the item.
Let us examine the increase in Book Value per Share (BVPS) for the top 6 banks over the past 4 years. Refer to the table provided below to observe the growth. ICICI Bank experienced the highest growth in BVPS, with a CAGR of 18.0%, rising from Rs. 175.2 in FY2020 to Rs. 339.4 in FY2024 on a standalone basis. Following ICICI Bank, HDFC Bank, State Bank of India (SBI), Axis Bank, Bank of Baroda (BoB), and Punjab National Bank (PNB) witnessed growth in their BVPS, in that order.
In the same time frame, HDFC Bank experienced a growth of 16.6% on a Compound Annual Growth Rate (CAGR) basis, increasing from Rs. 311.8 to Rs. 576.0. SBI, on the other hand, grew by 13.8%, from Rs. 233.3 to Rs. 391. Axis Bank saw a growth of 12.8%, from Rs. 301.1 to Rs. 486.7. BoB's growth stood at 8.7%, from Rs. 155.3 to Rs. 216.8. Lastly, PNB's growth was 1.1%, from Rs. 85.5 to Rs. 89.2, on a standalone basis.
It is worth noting that HDFC Bank has the highest Book Value per Share (BVPS) of Rs. 576.0 at the end of FY2024, followed by Axis Bank with Rs. 486.7. Conversely, PNB has the lowest BVPS among the top 6 banks in India, amounting to Rs. 89.2. The BVPS of ICICI Bank and PNB have shown an increasing trend in the last 3 consecutive years, while HDFC Bank's BVPS growth rate has decreased over the same period. Additionally, the growth rate of BVPS for the top 3 private banks has been higher than that of the top 3 public banks.
Let us now analyze the P/B ratio of the top 6 banks in India. Upon reviewing the 5-year average P/B ratio provided in the table below, it is evident that the 5-year average P/B ratio of the leading 3 private sector banks surpasses that of the top 3 public sector banks.
The HDFC Bank stock has been traded at a valuation that is more than three times its Book Value Per Share (BVPS), while the stocks of PNB and BoB are being traded at a discount, which is less than one times their respective BVPS.
P/B Ratio of Top 3 Public Banks:
The State Bank of India has an average P/B ratio of 1.49 over the past 5 years. Its P/B ratio stood at 1.92 at the end of FY2024 and 2.55 on June 14, 2024, both higher than its historical P/B ratio. On the other hand, Bank of Baroda has a 5-year average P/B ratio of 0.72. Its P/B ratio was 1.22 at the end of FY2024 and 1.20 on June 14, 2024, also higher than its historical P/B ratio. Lastly, Punjab National Bank has a 5-year average P/B ratio of 0.65. Its P/B ratio was 1.39 at the end of FY2024 and 1.56 on June 14, 2024, exceeding its historical P/B ratio. Consequently, when comparing the current P/B ratios of the top 3 public banks with their respective historical P/B ratios, all are trading at a premium.
P/B Ratio of Top 3 Private Banks:
The average P/B ratio over 5 years for HDFC Bank stands at 3.18. At the end of FY2024, its P/B ratio was 2.51, lower than its historical average, and on 14th June 2024, it was 3.58, slightly higher than its historical average. For ICICI Bank, the 5 years average P/B ratio is 2.80. Its P/B ratio was 3.23 at the end of FY2024 and 4.98 on 14th June 2024, significantly higher than its historical P/B ratio. Axis Bank's 5 years average P/B ratio is 1.93. Its P/B ratio was 2.15 at the end of FY2024 and 3.06 on 14th June 2024, both higher than its historical P/B ratio. Consequently, when comparing the current P/B ratios of the top 3 private banks with their respective historical averages, all are trading at elevated levels.
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Data Source
- Moneycontrol.com
Disclaimer
The content or analysis presented in the Blog is exclusively intended for educational purposes. It is important to note that this should not be considered as a suggestion for investing in stocks or as legal or medical advice. It is highly recommended to seek guidance from an expert before making any decisions.