NEW YORK - Indian Bank stocks are being valued at a premium compared to American Banks of greater size. Yesterday, we pointed out that PNC Financial has a market capitalization of $4 billion less than ICICI Bank despite having double the amount of assets, and earnings power.
How can Indian Banks be valued so high? The Future I guess... But the Indian economy is 1/14 the size of the American and in twenty years at the current growth rate of each country it will be 1/4 the size. If the Indian Banks are to grow with the economy at a linear rate it would mean by 2030 their largest banks will be 1/3 the size of Bank of America by assets at the present date. Despite these facts, ICICI bank currently has 1/4 the valuation of BAC. But we tend to think it has to do with Bank of America being at a ridiculous price.
Furthermore, Indian banks have inherit risk due to their large contingent liabilities on their balance sheet. They have hedges that are sometimes 400% the size of their balance sheet. U.S. Banks such as PNC Financial have showed better growth than ICICI and are currently double the size but have a lower valuation. The Indian economy and its banks have a bright future but their banking stocks valuation seem a little stretched. Ignorance is bliss for investors.
To read our report on BAC click here and PNC click here.
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