Carefully read below two points:
- Stock prices fall by 58% but market capitalization goes up by 4.44% over a period of 4 years.
- Book Value Per Share falls by 59% but the overall Net Worth increases by 2.4% over a period of 4 years.
Sounds insane right? And how is that even possible?
Some of you may think that, it is possible when a company announces stock splits or stock bonuses, etc. But to add to your curiosity, there were no stock splits or stock bonuses during the period considered.
This is the curious case of Punjab National Bank (PNB) and other Public Sector Banks. Below table summarises PNB’s numbers since 2015.
It can be observed that from 2015 to 2019, Overall book value also known as Net worth has gone up from ₹40,648 crores to ₹41,616 crores and Market Cap also went up from ₹ 26,780 crores to ₹ 27,970 crores. However, during the same period, BVPS fell from ₹ 219 in 2015 to ₹ 90 in 2019.
This is of course possible only when the number of shares outstanding increases, and in the case of PNB, number of shares outstanding increased from 185.46 crores in 2015 to 460.4 crores in 2019. As mentioned earlier, this increase in the number of shares were not on account of any stock split or stock bonuses but as a result of new equity shares issued to the Government for recapitalization. Central Government’s holding in PNB went up from 59.8% in 2015 to 75.41% in 2019.
To understand how this works, consider a hypothetical scenario of a Bank’s balance sheet having only three items: Share Capital, Advances and Cash.
Year 1:
Share Capital 1000
Sources of Funds 1000
Advances 1000
Cash in Hand 0
Application of Funds 1000
Next year 20% of bank’s advances turn bad and are written off as losses.
Year 2:
Share Capital 800
Sources of Funds 800
Advances 800
Cash in Hand 0Application of Funds 800
Next year existing shareholders bring in more funds so that bank remains in business.
Year 3:
Share Capital 1000
Sources of Funds 1000
Advances 800
Cash in Hand 20
Application of Funds 1000
Next year bank gives out more loans
Year 4:
Share Capital 1000
Sources of Funds 1000
Advances 1000
Cash in Hand 0
Application of Funds 1000
And the cycle continues…Coming back to the case of PNB, from the table above it can also be observed that the Gross NPA % has gone up from 6% in 2015 to 15% in 2019, Provisions made per year went up from ₹ 10,298 crores in 2015 to ₹ 48,435 crores in 2019 and yet PNB’s Price to book value ratio is at 0.67 in 2019 vs 0.66 in 2015.
This signifies that though the stock prices declined by 58% in the last 4 years due to deteriorating assets (even recapitalised money went to the same ditch of “NPA”) and minority shareholder’s wealth been massively destroyed, the de-rating of price multiple has not yet happened. Even the “stable book value” (which is the book value factoring all NPA’s turning to loss assets) has declined from ₹ 136 in 2015 to ₹ 25 in 2019.