The Hindu Business Line : PSU bank stocks turn risky

BANK shares have traditionally been known as widows' share. The implication — trust them to yield safe and steady, return on investment, devoid of the swings that are associated with riskier stocks. Whether compared on the parameter of wild swings in price or capital appreciation, they were expected to be modest when compared to those offered by the broad market.

In May 2003 too, stocks of public sector banks were known for their high dividend yields and low price to earnings ratio. Their status as under valued investments and the fact that they provided dividend yields that were higher than that of fixed deposit rates would have attracted a horde of conservative investors.

Their status as safer havens has, however changed over the past year or so. Though investors would have earned a decent return on their investment, they have also invested in probably the most risky bunch of stocks in the market.

The beta, a measure of risk, of all the public sector bank stocks, which are included in either Nifty or Junior Nifty index, was more than one for the 12 month period ended April 2004. The beta for these stocks had also increased compared to the corresponding twelve-month period ended April 2003. A beta of more than one indicates that if the market were to fall by 10 per cent, these stocks would fall by more than 10 per cent.

The beta of some stocks such as Canara Bank, Punjab National Bank and Bank of Baroda was much higher than 1.5. In contrast, the betas of all the private sector banks, which are part of either Nifty or Junior Nifty, were less than 1.

The higher beta of public sector bank stocks is comparable to that of software stocks in 2000 and 2001. The only difference is that such stocks were then trading at price to earnings multiple of more than 30 while these bank stocks commanded a multiple of only about 10 even at their peaks and are now trading at PE multiple of between 4 and 8.

Does the higher beta of public sector banks have anything to do with their fundamentals? Would their earnings dip sharply when economy's growth dips and rise sharply when economic activity gathers pace? It appears not. Fund managers disagreed that such large earnings volatility was not factored into stock prices in the 12-month period ended April 2004. The rise in the risky nature of these stocks is attributable to the presence of hedge fund investors, leveraged positions and a lot of speculative money entering these stocks, says the manager of one of the larger balanced funds.

He also says that `beta' as a measure of risk is seldom stable and keeps changing constantly. He, however, does not expect the volatility in prices of banks to come down although he expects bank stocks to out perform the markets.

Another fund manager from one of India's leading asset management companies also agreed that beta of banks will not stabilise in the near future. He says beta is a function of expected earnings volatility.

With a lot of policy formulation now involving banks and flow of credit, investors were genuinely concerned about earnings growth and that would be reflected in their volatility, he added.

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