Why is SBI's market cap so low compared to HDFC Bank?

Even as State Bank of India (SBI) has a balance sheet four times the size of HDFC Bank, the market capitalisation is just over a third of the private sector lender. SBI, the country's largest lender, also has a customer base nearly ten times larger than HDFC Bank.

The sheer worth of the private bank can be made out from the fact that the total market capitalisation (m-cap) of all government-owned banks (including SBI) combined is less than half its value. While HDFC Bank has a m-cap of Rs 6.07 lakh crore, SBI with a m-cap of Rs 1.68 lakh crore lags far behind.

HDFC Bank stock is up nearly 44 per cent since seeing a record low on March 24, a day ahead of the first coronavirus lockdown. SBI is up nearly 4 per cent in the given period. Comparing the price to equity (P/E) ratio, for HDFC Bank it currently stands at 22.35 and for SBI it's 7.34. P/E ratio shows what the market is willing to pay today for a stock based on its past or future earnings. A high P/E could mean that a stock's price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings.

Then, what's the reason behind the sharp difference in the m-cap of the two lenders?

"Stocks like SBI are marred by  perception among investors about many government directives which may not be in shareholders' interests always. Historically, SBI has had more challenges in tackling NPA relative to HDFC Bank leading to depressed multiples," said Abhimanyu Sofat, Head Research, IIFL Securities.

There is also a persistent risk of decline in asset quality amid uncertain times due to exposure to different sectors. SBI's non-performing assets (NPAs) stand at 2.23 per cent as on March 31, 2020. Since it has been inconsistent, future deterioration cannot be clearly ascertained, analysts said.

"The asset quality and growth for HDFC Bank are better than SBI which has led HDFC Bank to command a premium. Further, in the current scenario where banks are reluctant to lend due to increased uncertainty, there is increased fear in the market that SBI being government-controlled, would continue to lend. This can potentially increase loan growth for SBI. It also increases the risk of further deterioration of asset quality," said Ajit Mishra, VP Research, Religare Broking.

The investors also generally prefer to invest in banks that have managed to demonstrate a certain degree of predictability in their earnings performance amid uncertain periods, experts further say.

"HDFC Bank has relentlessly, over the years, tried to contain the formation of bad loans and has consistently maintained net non-performing asset (NNPA)% between 0.36-0.40% which is best in terms of asset quality in the entire banking industry. Same goes with their margins. The net interest margins (NIMs) have been between 3.90-4.30% over the years and there has been consistency of double-digit growth in deposits as well as on advances. On comparing this to a behemoth such as State Bank of India, we see that even though it has a balance sheet almost four times bigger and ten times more customers than HDFC Bank, this bank's performance is not consistent enough for market participants to predict its performance," says Nirali Shah, Senior Research Analyst, Samco Securities.

"The same goes with its NIMs and profitability. Generally, public sector banks are defined for their losses from their rural branches, advances to priority sector, stiff competition from private sector banks, etc. Hence, in the absence of consistency and predictability in fundamental performance they normally trade cheaper to private peers. And this lack of confidence by investors is rightly visible in SBI's market cap," Shah added.

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