Investors favor Indian over U.S. Banks(NYSE: BAC) (NYSE: IBN) (NYSE: PNC)

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.

Indian Banks Are Better Than American? Apparently (NYSE: IBN) (NYSE: PNC)

Shares of ICICI bank and other Indian banks have soared since August. In the last three months the KBW Banking index is down 10% while ICICI Bank (IBN) is up 35%. Currently IBN has a market of $32 billion this trumps PNC Financial the 6th largest bank in the United States. But are investors pricing in to much growth for these banks?

Lets make some comparisons:

GDP of India $1.16 trillion, GDP of U.S. $14 trillion
Population of India 1.1 billion, population of U.S. 307 million
GDP Per Capita of India 3,000, GDP per capita of U.S. 46,000
Current GDP growth rate of India 7.1%, GDP growth of U.S 2%

Now that we have cleared up all the numbers lets examine the differences between the two banks. PNC Financial has a market capitalization of $28 billion, ICICI Bank has a market capitalization of $32 billion.

ICICI has assets of $110 billion, PNC has assets of $260 billion
ICICI has earnings of $1.1 billion in 2009, PNC earned $2.5 billion
ICICI has a Return on Equity ROE of 10%, PNC has an ROE of 12%.

Now lets look at some figures. If India's GDP were to grow at 8% a year then India's GDP would be at $5 trillion while the U.S's with 2% growth would be at $20 trillion.

So what are investors pricing in for Indian Banks? The banks have more risk than American banks because almost all Indian Banks have contingent liabilities for derivative losses that are usually twice the companies entire balance sheet. The second reason is that ICICI bank is currently half the size of PNC Financial but gets a higher valuation. The third risk is the Indian economy, and currency fluctuations. The fourth risk is the amount the Indian economy will need to grow to be similar to that of the U.S. economy. The fifth risk is that they are currently growing at a slower rate then PNC Financial.

One can buy PNC financial, double the size of an IBN for $4 billion less dollars than ICICI Bank. Seems like quite the deal. Indian banks probably appear to be overpriced, or American banks are just very under-priced. I am more inclined to agree with the latter. But I would be hesitant to put money into Indian banks at the current time.