InvestorQ : Why have the valuations of ICICI Bank and HDFC Bank been converging in the last few months?
Anamika Sodhani made post

Why have the valuations of ICICI Bank and HDFC Bank been converging in the last few months?

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Angel dcosta answered.
2 weeks ago
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One of the big news stories in the market has been that the valuations of HDFC Bank and ICICI Bank are converging after a very long time. Consider these. In 2010, HDFC Bank was trading at a P/BV ratio of 3.5X while ICICI Bank traded at a price to book of 1.7X. Things have changed since Sandeep Bakshi took over as CEO of ICICI Bank and adopted a sharp retail push in its asset mix. Now both are converging on with ICICI Bank P/BV at 2.3X and HDFC Bank at 2.5X.

There are two factors that have driven this convergence in the case of HDFC Bank and ICICI Bank. The important ratio of net interest margins or NIMs moved up sharply from 3.3% to 4% in the case of ICICI Bank over the last 8 quarters. In contrast, during the same period, the NIMs of HDFC Bank moved lower from 4.4% to around 4%. This has been one of the key factors that has led to convergence in valuation metrics of the two banks.

The other very important reason for this convergence is the way the ROEs have converged in both cases. Over last 8 quarters the ROE of HDFC Bank improved from 15% to 16.8%. However, in the same period, the ROE of ICICI Bank has more than doubled from 8% to 16.8% on better asset quality and yield mix. This is the second major factor that has led to ICICI Bank and HDFC Bank converging on valuation metrics in the last 2 years.
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