PSU Banks Split: Graham Discounts vs Altman Distress

The PSU banks split is now impossible to ignore on NSE. [LIC Housing Finance](/stock/LICHSGFIN) (NSE: LICHSGFIN) trades 56% below its Graham number. [REC](/stock/RECLTD) (NSE: RECLTD) sits 47% below. [PFC](/stock/PFC) (NSE: PFC) sits 52% below. Meanwhile, many public sector banks sit in the Altman Z distress zone below 1.8. At a Nariman Point brokerage last week, an analyst had two spreadsheets open. The first showed those Graham discounts. The second showed Altman Z-scores under 1.8 for [Canara Bank](/stock/CANBK) (NSE: CANBK) and [Bank of Baroda](/stock/BANKBARODA) (NSE: BANKBARODA). [Union Bank of India](/stock/UNIONBANK) (NSE: UNIONBANK) was also below that line, along with [Central Bank of India](/stock/CENTRALBK) (NSE: CENTRALBK) and [J&K Bank](/stock/JKBANK) (NSE: JKBANK). That's a strange sight: the same sector offers both the widest margins of safety and the highest balance-sheet risk. Value investors who treat all state-linked financials as one trade are missing the divide. The Graham Discount Side The Graham number is a 1930s-era formula: the square root of 22.5 times earnings per share times book value per share. It's old, but it still catches low-expectation stocks. [REC](/stock/RECLTD), established in 1969 to finance rural electrification, and [PFC](/stock/PFC), set up in 1986 to fund power projects, are not banks. They borrow long and lend to power utilities. They carry project risk. [LIC Housing Finance](/stock/LICHSGFIN), launched in 1989 as LIC's housing finance arm, has a cleaner retail loan book. The market prices all three as if their asset quality will crack. Their FairStock Scores sit above 70 on value factors, with strong earnings yield and dividend support but lower growth momentum. Why the discount? Part of it is optical. A Graham number multiplies book value and earnings, so asset-heavy financiers will always look cheap if the market trusts neither their margins nor their loan books. Part of it is structural. NBFCs depend on wholesale ...