Valued more than Morgan Stanley, but HDFC Bank has a score to settle with ICICI Bank

economictimes.indiatimes.com:

HDFC Bank racing ahead of global banking giants like Morgan Stanley and HSBC in terms of market capitalisation is grabbing headlines, what matters more for investors is whether the merged entity has enough firepower to widen its valuation premium against closest rival ICICI Bank. As one of the biggest wealth creators on Dalal Street, HDFC Bank has historically commanded a higher valuation premium against ICICI Bank and has often been worshiped as the epitome of a classic consistent compounder that can double every 5 years or so.

However, in the last couple of years, HDFC Bank’s valuation multiple has contracted while ICICI Bank has had a steady increase in its valuation largely replicating its consistent earnings performance, healthy growth in retail and SME segments, and lower-than expected credit cost. Uncertainties surrounding the merger was also another overhang on HDFC Bank stock and as a result of the changing narrative, HDFC Bank is currently trading in-line with ICICI Bank (core bank), shows calculations done by Axis Capital.

HDFC Bank shares have underperformed by gaining around 60% in the last 3 years when the Sensex is up over 81%. During the same period, ICICI Bank stock has zoomed 167% with institutional investors lapping up the counter with both hands.

“In the next 12 months, the valuation gap may marginally inch higher due to re-rating of HDFC Bank but it is expected to remain narrow vs a large gap earlier as ICICI has significantly uplifted its business franchise and growth. It continues to outperform the sector,” Rahul Malani, Research Analyst, Sharekhan by BNP Paribas, told ETMarkets.