Axis Bank, PNB and few PSU banks are good buy for long-term investors

Since March 09 the benchmark Nifty index of the NSE has lifted by 78% hence the bank shares have moved up by higher margins, but not of all the banks.

After analyzing the stock market current position the Axis Bank, Punjab National Bank, Bank of Baroda and Bank of India are still in a very good position and a good buy for long-term investors in case growth and historical assessment are taken into account.

Since 2003 over a dozen times there have been crucial turn up or down in the bull market. ETIG evaluated the assessments of banks at these points as market dynamics often change with every considerable gain or fall. Banks’ growth line is also taken into consideration at these points as growth determines valuations.

For instance take the case of ICICI Bank. On five important dates from March 9, 2005 to July 26, 2007 banks stock traded at price to earnings (P/E) multiple of between 15 and 30. This was the only way when the market headed upwards. At this time the the growth in earnings ranged from 20-30%.

Now the bank stock is trading at a P/E of 23 and profits have declined by 10% in FY 2009. Therefore the interesting outcome of this is: although the stock is trading at pretty much the same valuation as it was in those “good old days” but the wave has changed now and it has been most affected due to the slowdown in the economy, which means that it is overrated at current prices.

For many other banks, although the valuations are still low, but their growth too has been affected. Applying the same standard as of ICICI Bank, it has been observed that Indian Overseas Bank (IOB) had a P/E multiple of between 7 and 9 at the five decisive points between March 9, 2005 and July 26, 2007 though its profit growth was in the range of 20-30%.

At present the bank’s P/E is 3.6, but net profit growth is just 10% in FY 2009, due to which banks growth is very slow. As compared to growth in earnings the valuations have come down. Therefore, it should not be interpreted as a cheap stock as the fall in growth demands a decline in valuation. Similar case is case with Allahabad Bank, Oriental Bank of Commerce and Karnataka Bank.

There are also some bank stocks which appear to be underestimated. From March ‘05 to July’ 07, Axis Bank did business at a P/E of 20-25 when net profit growth was 20-50 %. Currently the stock is trading at a P/E of 14, with net profit growth of 69% in FY 2009. The conclusion is that stock markets have not been giving it the best it deserves to show the faster rate of growth.

Even a few public sector banks seem to have intrinsic value. Punjab National Bank (PNB) did business at a P/E of 10-13 when its growth was 10-30 % between March 9, 2005 and July 26, 2007. At present, the stock trades at a P/E of 6.3. However, its net profit has grown by 51% in FY 2009. Estimation has come down but the growth has gone up, making it an even cheaper stock.

Bank of Baroda and Bank of India in the same way as of PNB, also appears to be persuading buys as their current estimations have not taken into account their faster pace of growth. In case it would have been the secular Bull Run the prices might have gone up even more sharply as the market discounts fundamentals much more easily.

Among other banks, Indian Bank and Corporation Bank are also good buys.

While HDFC Bank’s valuations have remained in the range of 25-30 but it has gained a historic growth of 30%-40 %. At present its P/E is at 29 and profit growth was 41% in FY 2009 which means that the stock is as attractive as it was. The important thing for investors is that due to such stability often stock becomes a market performer. Therefore, it is improbable that HDFC Bank will make break through in the market.