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HDFC Bank is the market favourite

Manas Chakravarty | August 10, 2004

The stock market has little doubt about who is winning the corporate shootout in the banking sector: it gives HDFC Bank a price-earnings ratio of over 19, compared with a PE of around 11 for ICICI Bank, and a multiple of about 6 for the State Bank of India, on a trailing 12-month basis. The rankings wouldn't be any different if comparisons are made on a price-to book basis.

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Big certainly doesn't seem beautiful in banking. Why else does the State bank of India, with total assets more than three times ICICI Bank's assets, get such a low discounting? Or why does ICICI Bank, which in turn has assets almost three times HDFC Bank's, fetch a lower multiple than the latter?

It's not difficult to see why. The primary reason for preferring HDFC Bank lies in the quality of its assets. On June 30, its net non-performing assets were 0.2 per cent of advances, while ICICI Bank's NPAs were 2.7 per cent of customer assets, and SBI's NPAs were 3.45 per cent of advances. That figure, however, doesn't take both ICICI Bank's and SBI's thousands of crores worth of "restructured assets" into account.

Nor has HDFC Bank's emphasis on quality come in the way of higher growth. For the quarter ended June 30, 2004, HDFC Bank's earnings per share showed a growth of 28.9 per cent, the comparable figure being 10 per cent for ICICI Bank (low on account of the per cent increase in equity) and 17.6 per cent for SBI.

Going forward, with the scope for treasury profits becoming increasingly difficult, growth will have to come from higher net interest income, which is the difference between interest earned and interest expended.

HDFC Bank is well ahead on this metric, with its net interest income rising by 43.6 per cent in the June quarter, compared with 38.7 per cent for ICICI Bank and a mere 10 per cent for SBI.

Significantly, in spite of lower treasury gains in the first quarter of FY 05, HDFC Bank was able to increase its operating profit year on year by 21 per cent, while ICICI Bank's operating profits rose by 10.2 per cent.

SBI was a study in contrast, with operating profits in Q1 falling by 18 per cent. The point is that while both HDFC Bank and ICICI Bank have been able to offset the loss in their treasury income by increasing their net interest income, SBI has been unable to do so.

HDFC Bank also has the highest net interest margins. Interest expended as a percentage of interest earned in the June quarter was 43.2 per cent for HDFC Bank, 61.5 per cent for SBI, and a huge 71.3 per cent for ICICI Bank, the legacy of high-cost borrowings. Yet another major cost is on account of employees.

For HDFC Bank, payments to and provisions for employees was 7 per cent of total income for the June quarter. The comparable figure for ICICI Bank was 5.8 per cent, and a huge 18.6 per cent for SBI.

But so far as SBI is concerned, the market may not have truly taken its consolidated strength into account. It's worth remembering that last fiscal, SBI's consolidated profits were 50 per cent higher than its standalone profit.

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