SBI breathing down ICICI Bank’s neck in market-cap race

More than four years ago, ICICI Bank, India’s second largest private bank, had crept ahead of SBI, India’s largest bank, in terms of market value. In the past 11 months (10 March 2023 to 7 February 2024), it steadily widened the gap with SBI to a daily average of over ₹1.44 trillion.

Then, the state-run lender came from behind, dramatically shrinking the gap to just ₹585.5 billion in the past 12 trading sessions through 23 February, as SBI joined a rally in stocks of public sector companies. As of Friday, SBI’s market cap stood at ₹6.77 trillion, against ICICI Bank’s ₹7.44 trillion, Bloomberg data showed.

Investors are betting on greater operational efficiency, robust loan growth and stable credit costs at the state-run bank, analysts said. They believe the outperformance could continue, and that SBI’s market cap might converge with ICICI Bank’s over the coming months.

“Low cost of deposits, healthy loan growth and use of better technology to gain more customers are among the factors markets are pricing in, which has caused the value re-rating,” said A. Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC.

“It’s quite probable that the PSU banking stock could maintain its momentum,” Balasubramanian said when asked whether SBI’s market cap could converge with ICICI Bank’s.

Bloomberg data over five years shows that the last time SBI was ahead of ICICI Bank in market cap was in 2019. Between 25 February and 6 August 2019, the SBI stock traded at an average daily value of ₹29,686.07 crore above ICICI Bank’s.

After that, ICICI Bank pulled ahead, with the gap between the two expanding to a record ₹1.76 trillion on 7 August last year. From 10 March last year through 7 February 2024, ICICI Bank’s market cap stayed ahead of SBI by more than ₹1 trillion on a daily basis, shrinking below that mark only after 8 February.

Between 10 March 2023 and 23 February 2024, the SBI stock has outshined ICICI Bank; while SBI rose 38.68% to ₹759.05, ICICI Bank rose 25.95% to ₹1,061.3 during the period. The outperformance increased in the past 12 sessions, with SBI share return increasing 12.41% from ₹675, against ICICI’s relatively modest 3.83% return from ₹1,022.

“Between the two, odds of outperformance are stacked in favour of SBI,” said Nirav Karkera, head of research, Fisdom. “Though stories for both banks are distinct, there’s enough reason to believe that valuations for ICICI Bank are rather fairly priced in, whereas there’s some more headroom for an earnings-led upgrade in SBI.”

According to Siddhartha Khemka, research head of Motilal Oswal Financial Services, SBI remained the brokerage’s “top pick” among banks as relatively steady credit costs of 35-40 bps would enable an estimated 22% earnings growth on a compounded basis over FY24-FY26. “We expect a 12-month price target of ₹860 and convergence of market cap with that of ICICI Bank over the next few months,” Khemka added.

Interestingly, the optimism on SBI comes amid global brokerage Goldman Sachs downgrading both stocks to neutral from buy, on the premise that their return on assets (RoA) had peaked due to repricing of deposits and slower loan growth, which would impact earnings.

Goldman’s 23 February report titled “India Banks: Goldilocks Period Over” said SBI’s RoA may shrink to 0.93% and 0.92% respectively in FY24 and FY25 from 0.96% in FY23 as retail deposit rates rise. The report estimates ICICI Bank’s RoA to rise to 2.34% in FY24 , before shrinking to 2.10% in FY25 from 2.13% in FY23.

In terms of valuation, Goldman Sachs says both SBI — at 1.2 times one-year forward price to book ratio — and ICICI Bank — at 2.2 times one-year forward price to book ratio — trade around 30% higher than their long-term averages of 0.9 times and 1.7 times each. It, however, raised the one-year price target of SBI to ₹741 a share from ₹677, while revising downward the price target for ICICI Bank to ₹1,086 from ₹1,179 year earlier.

However, Jayesh Bhanushali, lead, research at IIFL Securities has a different view: “Considering an incremental staff expense of ₹15 billion ( ₹1,500 crore) per quarter starting from FY25 and an average salary per employee of ₹3 million ( ₹30 lakh, compared to ₹1.1-2.2 million or ₹11-12 lakh for peers), it is anticipated that the cost-to-income ratio (CIR) will remain high at 53% in FY25-26E. We expect private banks to outperform SBI due to the latter’s slowing earnings momentum and no longer attractive valuations.”