HDFC Bank vs SBI: Which banking major has better long-term investment opportunities?

Indian banks have been healthiest in a decade, said RBI Governor Shaktikanta Das, in his RBI Monetary Policy speech on August 10. Once again in the June 2024 quarter, the banking sector led the earnings growth driven by a recovery in asset quality, loan growth, and improvement in margins.

Amid this backdrop, let's analyse between banking majors HDFC Bank and State Bank of India (SBI), which stock has better opportunities in the long term.

Stock Price Trend

In the last one year, HDFC Bank has outperformed SBI, however, both stocks underperformed the benchmark Nifty Bank index. Shares of HDFC Bank gained 9.5 percent in this period while SBI was up around 9 percent. In comparison, the Nifty Bank index advanced over 14 percent in the last 1 year.

Meanwhile, in 2023 YTD, both stocks were in the red. SBI lost around 6 percent giving negative returns in 4 of the 8 months so far in the current calendar year. On the other hand, HDFC Bank was flat this year so far, down just 0.03 percent, giving negative returns in 5 of the 8 months. In comparison, the Nifty Bank rose over 3 percent in 2023 YTD.

Currently trading at ₹573.55, SBI is now around 9 percent away from its 52-week high of ₹629.65, hit in December 2022 whereas it has risen 15 percent from its 52-week low of ₹499.35, hit in February 2023.

Currently trading at ₹1636.30, HDFC Bank is now around 7 percent away from its 52-week high of ₹1,757.80, hit in July 2023 whereas it has added 20 percent from its 52-week low of ₹1,365.05, hit in September 2022.

Meanwhile, in the long term, 3 years, SBI has emerged as the winner. The stock has given multibagger returns, soaring 184 percent while HDFC Bank has surged just 53 percent.

Earnings

In the June quarter, HDFC Bank beat estimates to post a 30 percent jump in its net profit at ₹11,951 crore in the April-June quarter versus ₹9,196 crore in the year-ago period. Meanwhile, its net interest income also grew by 21.1 percent YoY to ₹23,599 crore in Q1FY24. Core net interest margin was at 4.1 percent on total assets, and 4.3 percent based on interest-earning assets. Asset quality of the lender also improved as the lender's gross non-performing assets (GNPA) ratio came at 1.17 percent, improving from 1.28 percent in the corresponding period a year ago. Similarly, its net NPA stood at 0.30 percent from 0.35 percent in the year-ago period.

India's largest lender State Bank of India (SBI) beat expectations to post almost a three-fold jump in its net profit for the quarter ended June 2023. This was the bank's highest-ever net profit for the fourth consecutive quarter. However, margins were a bit disappointing in the quarter under review.

SBI's Q1 net profit jumped as much as 178.25 percent YoY to ₹16,884 crore driven by robust net interest income and strong loan growth. Its net interest income (NII) for the quarter under review also rose 24.71 percent YoY to ₹38,905 crore while its domestic net interest margin (NIM) came in at 3.47 percent, up 24 bps YoY but fell on a sequential basis. The lender's asset quality also improved with its gross NPA down to 2.76 percent vs 2.78 percent in the previous quarter and 3.9 percent in the year-ago period. The net NPA also fell to 0.71 percent from 1 percent last year.

Which is a better stock for the long term?

Dnyanada Vaidya, Research Analyst - BFSI, Axis Securities likes HDFC Bank

While we like both HDFC Bank and SBI, we prefer HDFC Bank over the long term. As a merged entity, the bank is well-placed to deliver sustainable growth given the more extensive addressable customer base, higher cross-selling opportunities, and a more stable loan book given a lower share of unsecured products and a higher share of longer-tenure mortgages. Deposit mobilization for HDFC Bank will be closely monitored, as it remains a crucial lever in supporting the bank’s healthy credit growth. While margin pressures will surface in the near term, the improved cost ratios and benign credit costs will enable the merged entity to deliver a stable RoA of 1.9-2% over the medium term. Current valuations for HDFC Bank also look reasonable.

Veer Trivedi, Research Analyst, SAMCO Securities has also chosen HDFC Bank between the two

We prefer HDFC Bank over SBI. The merger overhang has caused a considerable amount of de-rating which has opened a decent opportunity for the investors. The bank is in a comfortable liquidity position and we are confident of the bank delivering high teen credit growth in the medium term. The de-rating of the stock and the ability to touch 2 percent ROA on the merged book would drive the share price movement positively.

Jignesh Shial, Director - Research, Head of BFSI Sector at InCred Capital also prefers HDFC Bank over SBI.

We like both banks as both are focusing on increasing geographic presence while aiming for diversified growth at reasonable risk and manage cross-sell engines to maintain continuous customer engagement. However, HDFC Bank is currently trading below its historical mean valuation due to post-merger technicalities which we see as an opportunity.

We have turned positive on HDFC Bank post 4QFY23 results due to the bank’s growing presence across geographies (mainly in semi-urban and rural India) which we believe would aid growth even during an adverse credit cycle as India witnesses consistent improvement in financial penetration.

While SBI has witnessed the benefits of structural changes which have resulted in better underwriting, smoother customer servicing, and better profitability. SBI is delivering strong profitability led by lower credit costs and retail-led improved margins. Thus, we expect SBI to deliver strong mid-teen growth and mid-teen ROE, because of which its current valuations of 1.2x P/BV FY25F look attractive.

We believe SBI has enough room for re-rating which will be driven by consistent performance of the bank. Thus, SBI due to its strong retail orientation and consistent performance will see strong re-rating in the near to mid-term but for the long term, we prefer HDFC Bank which has the ability to deliver higher growth and better profitability consistently across cycles.

Suman Bannerjee, CIO, Hedonova, as well, prefers HDFC Bank

In my perspective, HDFC Bank stands out as the preferable long-term choice when compared to SBI. Its remarkable ranking in CRISIL's corporate banking for 2023, particularly in catering to middle market corporates, speaks volumes about its reliability. Notably, private sector banks, including HDFC Bank, have seen remarkable growth in their corporate partnerships, soaring from 33% in 2021 to an impressive 38% in 2022.

On the contrary, Vinit Bolinjkar, Head of Research, Ventura Securities has picked SBI between the two.

PSU banks are available at a discount, compared to private sector banks. In terms of FY26 P/B valuation, SBI is at 1.1X, while HDFC Bank is at 1.6X. In addition, the primary and immediate focus of HDFC Bank is to restructure the merged entity which could result in the near-term volatility in stock. On the other hand, SBI does not have any such near-term hiccups and could generate better alpha than HDFC Bank.