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Private sector banks - Premium valuations - Views on News from Equitymaster
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  • May 16, 2000

    Private sector banks - Premium valuations

    Private sector banks in India are actively capitalising on the opportunities presented by the new economy and the rapidly changing environment. Banks with the ability to adapt to the new market conditions, introduce new products which are better priced and delivered quickly will succeed in the long turn.

    Performance reflects the services provided The new private sector banks in India are growing faster than the public sector banks. They are more profitable and have cleaner assets (lesser non-performing loans). As can be seen from the table below, HDFC Bank's topline growth is comparatively higher than the other banks due to the value added services provided by it. In each of its business, the bank has succeeded in leveraging its market position, expertise and technology to create a competitive advantage and build market share. Also new private sector banks are more careful about their asset quality and consequently have low non-performing assets (NPAs). On the other hand public sector banks have large NPAs due to government regulations requiring them to lend to sectors where there is a low growth opportunity.

    Implementation of the latest technology and providing the value added services like phone banking, mobile banking and internet banking contributes further in increasing the volumes and improving profit margins of the private sector banks. Margins of public sector banks are squeezed due to lower interest spread and increasing cost of operation.

    Comparative financial performance (FY2000)
    Particulars HDFC
    Trust Bank
    Interest income (Rs bn) 6.8 8.5 8.8 4.4 24.6
    Growth 80.8% 56.8% 37.9% 12.2% 31.2%
    Net profit (Rs bn) 1.2 1.1 1.1 0.3 2.8
    Growth 45.6% 66.2% 53.5% 60.2% 21.2%
    Operating profit margins 44.9% 21.8% 42.3% 18.1% 29.0%
    Net profit margins 17.7% 12.3% 12.4% 7.8% 11.3%
    CAR 12.2% 19.6% 13.7% 9.3% 12.7%
    NPAs 0.8% 1.1% 0.9% 2.7% 3.5%

    Among the private banks HDFC Bank enjoys a premium valuation due to its distinct brand equity and diverse product portfolio. Centurion Bank and Oriental Bank trade at comparatively lower valuations, which are reflected from their Price/Book value ratio. Private banks will continue to enjoy higher valuations as long as they are able to maintain lower levels of NPAs while continuing to adopt the latest in banking technologies to improve their competitiveness.

    Comparative Valuations
    Particulars HDFC
    Trust Bank
    Market Price (Rs) 257.0 210.4 57.9 15.9 33.0
    Price/Book value (x) 8.3 3.6 43.5 1.0 0.5
    Market Cap (Rs bn) 62.5 41.4 7.0 2.4 6.4



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