Indian Private Banks Trade Below Long-Term Valuation Multiples Amid Robust Asset Quality and Fundamentals

Indian Private Banks Trade Below Long-Term Valuation Multiples

Despite having strong asset quality and fundamentals, Indian large private banks are trading well below their long-term valuation multiples due to various factors such as global macroeconomic uncertainty and weak investor sentiment.

The top banks, including HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank, are trading at a price-to-book (P/B) ratio of between 1.8X and 2.6X. According to a recent research report from DSP, Axis Bank is trading at the lowest point at 1.8X, while Kotak Mahindra and HDFC Bank are trading at 2.2X and 2X, respectively.

When compared with the 10-year averages, all except ICICI Bank are trailing behind. The 10-year average of the four banks is around 3.1X, while ICICI Bank's 10-year average is on par with its current P/B ratio of 2.6X.

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Banking stocks have been under pressure due to the impact of the West Asia war. The Bank Nifty has fallen nearly 7 percent since the start of the year, while the Nifty50 benchmark has lost more than 8 percent on a year-to-date basis.

HDFC Bank has faced additional challenges, including the resignation of former part-time chairman Atanu Chakraborty and the fallout from the Additional Tier-1 bonds issue.

Despite these challenges, DSP analysts believe that if the current energy-risk overhang fades, these valuations leave room for upside. HDFC Bank and Kotak Mahindra Bank are already trading below their long-term multiples and close to levels seen in past periods of severe stress.

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A price-to-book ratio is a metric for valuation for banks, used instead of price-to-earnings (P/E) due to the liquid and marked-to-market nature of bank assets.

Core operating metrics remain supportive for the large private banks. Q4 disclosures from HDFC Bank and ICICI Bank reported a net non-performing asset ratio of 0.38 percent and 0.33 percent for the March quarter, respectively, compared to 0.43 percent and 0.39 percent in the previous corresponding period.

However, their reported net interest margins (NIM) have been flat. ICICI Bank posted a NIM of about 4.3 percent as of the end of the quarter, while HDFC Bank reported a NIM of 3.4 percent.

Axis Bank will present its fourth-quarter results on April 25, while Kotak Mahindra Bank will likely report its earnings in the first week of May.

The trend has presented an attractive opportunity for investors who want to put their money in the banking sector, without pencilling in any re-rating of stocks. "More price decline will make them more attractive," DSP's analysts say.