Bank stocks: Cheap does not mean buy

Many are now cheaper after stock splits. But look at key parameters

With all top banks easing the entry barrier for the retail investor through aggressive stock splits, buying the stock of a good bank has become easier. State Bank of India (SBI)  announced 1:10 stock split on Wednesday. ICICI Bank, Punjab National Bank and Axis Bank have made similar announcements.

Stock splits are done when the price becomes very high, specially in a rising market, giving rise to fears the stock has become inaccessible to regular investors. Says Ashvin Parekh of Ashvin Parekh Advisory Services LLP: "The effort is to increase the volumes of transactions and attract retail investors. Many banks could be doing it as it will help them raise Tier-I capital."

The impact of the split will see SBI’s stock price come down sharply. Its price was Rs 2,487 on Wednesday. Each share's face value would become Rs 1. The price of the stock would become Rs 248, if the split (10 for one stock) was done on the same day. ICICI Bank's stock price, Rs 1,515, would have become Rs 303 after the split of 1:5.  

The BSE-Bankex

has been a great performer in the past year. It has returned 55 per cent vis-à-vis Sensex's 34 per cent. But all stocks have not had a great run. Federal Bank has run up by 110 per cent. Axis Bank and Punjab National Bank 93 and 91 per cent, respectively. But HDFC Bank, Kotak Mahindra Bank and SBI 33, 44 and 51 per cent, respectively.

The banking sector is saddled with non-performing assets. The gross non-performing assets (NPAs) in FY14 was 3.3 per cent, up from 3.9 per cent in FY13. The private sector's gross NPAs have fallen from 1.9 per cent (FY13) to 1.8 per cent (FY14). The public sector’s are up from 3.6 per cent (FY13) to 4.4 per cent (FY14).

Says Kartik Jhaveri, director, Transcend India: "I would look at profit growth, margins and NPA." Parekh says compare the price-earnings ratio with the sector average. The trailing twelve month ratio of the sector is 16.22. HDFC Bank, SBI and ICICI Bank's ratios are higher at 23.10, 17.35 and 17.47. Axis Bank, Punjab National Bank and Bank of Baroda are between 10 and 14, lower than the sector average. Importantly, do stock analysis. If unable to do so, invest through banking sector funds.