HDFC Bank beats major European peers on m-cap

At $45 billion, it has gone ahead of biggies such as Barclays, ING, Deutsche Bank and Credit Suisse

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HDFC Bank is now more valuable than many European banks such as Barclays, ING, Royal Bank of Scotland, Credit Suisse and Deutsche Bank. Only five European banks are worth more than HDFC Bank, compared to 14 last year, as a result of the crisis in the continent’s banking system.

At its current stock price, HDFC Bank is worth around $45 billion (Rs 3.02 lakh crore), more than twice the current market capitalisation of banking majors such as Deutsche Bank and Credit Suisse.

Analysts expect further slippage in the market value of European banks, given their mounting non-performing assets and poor economic growth in the Eurozone.

In the past year, the top 50 European banks (in terms of market value) have lost around 38 per cent of their market cap on average with some of the worst hit banks such as Italy’s UniCredit SpA and Ireland’s Allied Irish Bank down nearly two-third. In all, seven banks in Europe have lost 50 per cent or more of their market value in the past 12 months.

In comparison, HDFC Bank’s market capitalisation is up about five per cent in the past year and the trend continues to be bullish.

Most analysts believe there is a crisis lurking in the European banking system. Shares of most European banks are down significantly, while the cost of protection against default by European banks has risen sharply in the past year.

Besides, Indian banks get much higher valuation compared to their European counterparts, despite being much smaller in size. For example, HDFC Bank is still a pigmy compared to leading European banks in terms of asset size, revenues and net worth, but is 8-10 times more valuable on key valuation ratios such as price-to-book value and price-to-earnings multiple (See charts). This applies to other private sector banks such as ICICI Bank, IndusInd Bank, Axis Bank and YES Bank.

Based on calendar year 2015/financial year 2015-16 numbers, 37 European banks were ahead of HDFC Bank in terms of asset size and 28 were ahead of it in terms of total revenues. With an asset base of $2.5 trillion (about Rs 168 lakh crore), HSBC Holdings is nearly 22 times bigger than HDFC Bank.

“Banking is a highly leveraged business in Europe with most banks running huge balance sheets supported by relatively small amount of shareholders' equity. These banks also have off-balance sheet exposure in terms of derivative contracts and proprietary positions,” says Rajeev Thakkar, chief investment officer and director, PPFAS, a domestic mutual fund house.

HDFC Bank, for example, is currently valued at four times its book value or net worth. In comparison, most European banks are trading at a huge discount. For example, Barclays and Deutsche Bank are currently valued at one-third their book value, while HSBC is valued at just 60 per cent of its book value.

Experts, however, say investors in Europe fear banks losing most of their equity capital because of mounting risk from bad loans. “High leverage has magnified the problem. So, while one may wonder how HDFC Bank can have a market capitalisation greater than European banks, when things go bad, there is a risk of a large part of their capital getting wiped out. Investors anticipate a lot of bad loans coming their way in most of these,” adds Thakkar.

New rules on capital and liquidity that have come into force this year have also weighed on profitability and stock prices of European banks. Typically, banks’ performance is a proxy for the economy, and a brittle economic outlook for the region hasn’t helped.

In comparison, Indian banks such as HDFC Bank are prospering on the back of robust retail loan growth in India and higher capital requirement imposed by the banking regulator, which keeps them relatively safe during an economic downturn.