Bandhan Bank – in a sweet spot?

The corellation between book value and earning espically in banking is very high. This is majorly becasue you need to maintain CET ratio. You have to lend more to earn more.

There are 4 category you can make out of this

1. High PE high PB- These company banks get high valuation becasue of brand. Like hdfc, kotak

2. Hight PE low PB- You can conclude that the banks has lot of money but is unable to make profits. This is generally going to be temporary because of high provision or low efficiency and there is scope of improvement

3. High PB low PE- In this case the bank is making unsustainable profits becasue it does not have the book size to support earnings or the earnings are being distrubuted to less shareholders and dilution is likely. These cases should be avoided

4 Low PB low PE- this is generally for psu becasue of their image or some pvt banks like federal bank because of concentration in kerala.

Bandhan bank is getting a PB of 2.2 which is what axis and indusind are getting today. Book value also shows your ability to absorbe shocks.

Despite bandhan having low credibility, lower asset siize and lower capibility to absorbe shocks than axis,indus it was getting PB of 3.

But market should not discount the NIM bandhan bank has and further correction in this counter can be a good opportunity. People over react on banking stocks always. We can see the hammering in RBL and UJJIVAN and there after the bounce back.