Adjusted Book Value

The idea

A bank's reported book value assumes every loan on its books is worth what it claims. Reality is messier: some loans will not be repaid in full. Adjusted book value (ABV) strips out that optimism. It takes reported net worth and subtracts the bad loans the bank has *not yet* set aside money against — its net non-performing assets (net NPAs) — plus any other expected losses. What remains is a more honest estimate of the equity a buyer would actually be paying for.

This matters because banks trade on price-to-book multiples. If reported book value overstates true equity, the stock looks cheaper than it is. ABV is the analyst's way of pricing in the haircut.

Why the haircut has shrunk in India

For years, Indian banks — especially public-sector banks (PSBs) — carried large unprovided bad-loan piles, so the gap between reported and adjusted book value was wide. That gap has collapsed. The system's gross NPA ratio fell to around 2.1% by late 2025, a multi-decade low, and the more relevant figure for ABV — net NPA — dropped to roughly 0.5%.

For PSBs the turnaround is dramatic: gross NPAs fell from a peak near 14.6% in March 2018 to about 2.5% by 2025, while net NPAs reached multi-year lows around 0.5%.

What it means today

With net NPAs near half a percent, the difference between a bank's stated book value and its adjusted book value is now small for most large lenders. That clean-up is a big reason public-sector bank stocks were re-rated after 2020 — investors no longer had to assume a heavy hidden haircut.

The lesson for valuing any bank: never take book value at face value. Check net NPAs and provisioning, calculate the adjusted figure, and only then compare the price-to-book multiple. A bank trading at one times reported book may be expensive if its true, adjusted equity is far lower.