HDFC Bank v/s SBI - Mismatch in valuations - Views on News from Equitymaster

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HDFC Bank v/s SBI - Mismatch in valuations

May 19, 2000

Private sector banks in India are developing much faster and are way ahead in terms of technology adoption, new product development and value added services provided. Public sector banks on the other hand enjoy an edge only in terms of large distribution network. State Bank of India (SBI), is India's largest bank with an asset base of more than Rs 2,225 bn while HDFC Bank's asset base is just 2% of SBI. It runs the world's largest branch network of 9,000 branches and controls around 22% of India's loans and deposits. The bank is a leading player in trade finance and forex.

HDFC Bank is promoted by India's most recognised housing finance company HDFC. Its technologically superior branch networks (111 automated branches) and high quality services backed by HDFC's reputation grant it an advantage over other private sector banks. The bank provides a range of services including working capital finance, trade services, corporate finance and merchant banking. Among the private sector banks it has the lowest non-performing assets and enjoys comparatively higher capital adequacy ratio.

The comparative table reflects the quality of assets enjoyed by both the banks. HDFC Bank's topline is growing much faster than SBI and profit margins are superior. Although the size of the bank is not comparable but in terms of valuation parameters, HDFC Bank enjoys premium valuations. HDFC Bank's market capitalisation is 60% of SBI's market cap with Price/Book value ratio more than 8 times.

Comparative financial analysis
Particulars HDFC Bank SBI
Interest income (Rs bn) 6.8 214.5
Growth 80.8% 12.2%
Net profit (Rs bn) 1.2 14.7
Growth 45.6% 46.0%
Operating profit margins 44.9% 28.0%
Net profit margins 17.7% 6.8%
Market Price (Rs) 257.9 185.2
Price/Book value (x) 8.3 0.9
Market Cap (Rs bn) 62.7 97.5
Market Cap/Gross income (x) 9.2 0.5

In the scenario of intense competition, SBI is also shifting its focus to e-banking where HDFC Bank has already made a foray. The valuation parameters of SBI will change only if it gears up with the latest technology and excellent customer services with diversified product portfolio.

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