Indian private sector banks rank among the most highly valued globally. Four Indian banks find themselves in a list of 11 with market capitalisations of over $10 billion each and a price-to-book-value ratio (P/BV) of greater than 3, data sourced from Bloomberg showed. HDFC Bank, India’s largest private sector lender, is the top ranked globally on valuation multiples with a P/BV of 5.18. In fact, three Indian banks rank among the top 5 globally on this parameter. Indusind Bank and Kotak Mahindra Bank with P/BVs of 5 and 4.36, are joined in the top 5 club by Bank for Foreign Trade JSC of Vietnam (4.92) and Bank Central Asia TBK PT of Indonesia (4.38). Interestingly, not one European bank made it to the list of banks with P/BV greater than 3. The other banks in the elite 11 are Banco Del Crito Del Peru (Peru), Firstrand (South Africa), SVB Financial (US), Banco de Chile and Banco Santander (both Chile), and India’s YES Bank. The Asia Pacific emerging markets accounted for 6 of the 11 listers, reflecting the expected growth potential in the region, to warrant a more aggressive discounting leading to higher valuations. Notably, Indian private sector banks have managed to hold on to their coveted ranking despite recent revelations in the Indian banking sector that brought to light several frauds in the corporate banking segment. While state-owned banks have lost some sheen following the reports, this hasn’t rubbed off on the private sector peers yet. In fact, analysts anticipate that private sector banks will be able to grow even faster, with state-owned banks saddled with several non-business issues to contend with.
Analysts at Jefferies continue to prefer private sector banks, especially corporate oriented ones, to those with greater retail presence or moats around retail liability. “We are perennially positive on HDFC Bank” the brokerage said. The brokerage believes private sector banks are far better placed to capture higher market share across corporate and retail assets, as well as retail liabilities, especially in light of the heightened scrutiny of the state-owned banks undertaken by the government/RBI. The Mumbai based HDFC Bank has consistently maintained a low bad-loan ratio by limiting its exposure to heavily-indebted corporates and focusing on retail lending. Barring Kotak Mahindra Bank, the bad loan ratio of all these banks stood well below 2% at the end of December 2017, with HDFC Bank (1.3%) and IndusInd Bank (1.2%). The gross non-performing assets ratio of Kotak Mahindra Bank stood at 2.3% during the quarter, showed data from Capitaline. HDFC Bank, one of the most sought after stocks by both foreign and domestic investors, rallied 55.2% in 2017 after gaining as much as 11.5% in the year before.
The benchmark Nifty gained 28.7% and 3.01%, respectively, during the same period. IndusInd Bank surged 48.8%, Kotak Mahindra Bank 40.4% and Yes Bank 36.3% in 2017. Currently these four banks together account for over 12% of the Nifty-50’s market capitalisation of `72.2 lakh crore. HDFC Bank alone has a market value of `4.84 lakh crore. As of Wednesday, 89.5% of the 57 analysts that track HDFC Bank had a buy recommendation on the stock, with Macquarie having a one year price target of `2,676 per share, compared to Wednesday’s closing price of `1864.50. IndusInd Bank has a buy rating from 84.6% of analysts, Yes Bank 78.6% and Kotak Mahindra Bank 67.6%.