SBI, India's largest bank, is only worth a third of HDFC Bank — and the COVID-19 lockdown is making it bleed even more

• State Bank of India’s (SBI) shares fell by as much as 6% today while HDFC Bank dipped by more than 7%.
• Yet, there is a sharp difference in the market capitalization between the State Bank of India (SBI) and HDFC Bank.
• This despite the former having 10 times as many customers and four times the balance sheet.
• With the coronavirus pandemic, it’s the beginning of another cycle of non-performing assets for banks, according to Siddharth Purohit, a banking analyst with Angel Broking.

The State Bank of India (SBI), the largest bank in India, is only worth one-third of HDFC Bank, which in its own right, is the largest private sector bank in the country. This is despite the fact that SBI’s balance sheet is four times larger than HDFC Bank, has 10 times more customers, and is owned by the government of India.

What’s worse, the stock shed nearly 6% more in value in trade today.



However, the government ownership is a big reason for SBI being undervalued. Public sector banks have a social responsibility, have to invest in long gestation projects, and sync with the government’s political priorities. Private sector banks get to pick and choose where they invest.

These compulsions mean that the bank makes less profit than it potentially can. “If a particular stock is undervalued or overvalued is a separate matter. As an investor, everyone is more concerned about return on equity. That is why the valuation is different. It’s not about absolute quality,” Siddharth Purohit, a banking analyst with Angel Broking, told Business Insider.

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity.

HDFC Bank has always been one of the most premium valued banks in India. The stock trades as high as three to four times the book value. SBI, on the other hand, has had a value range of one or two-time book value at best. The book value of a company is essentially is the difference between that company's total assets and total liabilities as reflected in the balance sheet.

Banking is the first to get hit and the last to recover
With the coronavirus pandemic, it’s the beginning of another cycle of non-performing assets for banks, according to Purohit.

Banking, in general, will be one of the last sectors of the economy to recover even though it’s one of the first to get hit. “We’re already in a phase of credit issues. There is no credit in the market. Private banks, at this point of time, will be choosy as to where to lend and where not lend. But, being a PSU bank, they will have to do some sort of lending, which is required to revive the economy. Private banks don’t necessarily have to be a part of that,” he explained.


A recent ICICI Direct report from May 1 estimated that the stock may gain 27% to ₹235 over the next year but that won’t bridge the gap with HDFC Bank. “Given the emergence of Covid-19 and the resulting lockdown, exposure to MSME, telecom and unsecured retail remain vulnerable,” it said.

“I’m not expecting a major recovery. There may be a temporary bounce back in the stocks but they will not see a good time in the near term,” Purohit added.

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