Picking those with the least holes

The PNB-fraud has dimmed investor perception about PSU banks, but selective bottom-fishing continues in SBI and Bank of Baroda

The Rs.12,968-crore-fraud at PNB has once again highlighted the frailty of PSU banks’ risk-management systems. The banking system is already creaking under the weight of NPAs of Rs.730,000 crore and panicked investors lost no time in pronouncing their verdict. The stock price of PNB has corrected 33% and the Nifty PSU Bank Index has also fallen 11% in wake of the scam. Among large PSU banks, SBI has corrected 12.6%, while Bank of Baroda is down 14.7%. After the pounding, most PSU banks now trade at 10-30% discount to their book value (see: Ragtag bunch). However, Abhimanyu Sofat, VP – research, IIFL, says that the current beaten valuations are not what one should be looking at as the quality of the book itself remains uncertain. “RBI, through its new norms, is pushing banks to quickly recognise stress in their books, via a resolution plan or by referring the stressed no-resolution accounts for bankruptcy proceedings. Even though some PSU banks are trading at half their book value, it is difficult to guess how the books will look in light of the new NPA norms,” he adds.