SBI vs HDFC Bank: Which blue-chip lender should you pick for long term?

While the banking sector may have underperformed compared to the Nifty over the past 6 to 12 months, it remains poised for significant long-term growth due to India's largely underbanked population.

The Nifty Bank index has gained 8.5 percent year-to-date in 2024, compared to an over 13 percent rise in the benchmark Nifty. Over the past year as well, Nifty Bank has advanced around 17 percent, while the Nifty has surged approximately 26 percent.

Within the banking sector, private banks have experienced a sharper correction compared to their public sector counterparts. However, analysts anticipate a recovery for the overall banking space in the near future.

In this context, a key question for long-term investors is which blue-chip lender to choose: State Bank of India (SBI) or HDFC Bank?

Stock Price Trend

SBI has massively outperformed HDFC Bank as well as the Nifty Bank index this year so far. The public sector lender has jumped over 37 percent in 2024 YTD while HDFC Bank shed over 5 percent in this period.

In the current calendar year till date, SBI has given positive returns in 6 of the 7 months whereas HDFC Bank has been in the green in 4.

SBI rose almost 4 percent in July, extending gains for the 6th straight month. Before that, it added 2.2 percent in June, 0.5 percent in May, 9.8 percent in April, 0.5 percent in March, and 16.6 percent in February. However, the stock was flat but in the red in January, down just 0.08 percent.

HDFC Bank, on the other hand, fell around 4 percent in July after 4 straight months of gains. It jumped 10 percent in June, 0.75 percent in May, 5 percent in April and 3.2 percent in March. However, the stock witnessed some correction in the first 2 months of 2024, down 4 percent in February and 14.4 percent in January.

Meanwhile, in the last 1 year as well, SBI has given better returns. It has surged almost 47 percent versus an over 3 percent decline in HDFC Bank.

On the back of strong overall market sentiment and investor confidence, both SBI and HDFC Bank hit their record highs this year. SBI hit its new high of ₹912.10 in June 2024 and hit its 52-week low of ₹543.15 in October 2023. Currently trading at ₹880.85, the scrip is just 3.4 percent away from its peak and has surged over 62 percent from its year low.

Moreover, HDFC Bank touched its record high of ₹1,791.90 earlier this month on July 3, 2024. Currently trading at ₹1,619.90, the stock has tanked almost 10 percent from that peak. However, it has advanced over 19 percent from its 52-week low of ₹1,363.45, hit in February 2024.

In the long term, in 3 years, SBI has emerged as the winner. It has soared 105 percent while HDFC Bank has gained just 6.5 percent.

Earnings

SBI reported a standalone net profit of ₹20,698.35 crore in March quarter (Q4FY24), marking a 24 percent year-on-year (YoY) increase, driven by higher interest income and lower provisions. In the same quarter last fiscal (Q4FY23), the bank had reported a net profit of ₹16,694.5 crore. Sequentially, SBI's net profit more than doubled, soaring 125 percent from ₹9,163.96 crore in the December quarter of FY24 (Q3FY24).

For the entire financial year, SBI's net profit reached ₹61,077 crore, reflecting a 21.59 percent YoY growth after factoring in wage settlements and a one-time exceptional item of ₹7,100 crore. Operationally, SBI's net interest income (NII) rose 3 percent YoY to ₹41,656 crore, up from ₹40,392.5 crore in Q4FY23. Additionally, the bank's net interest margin (NIM) saw an unexpected rise to 3.30 percent from 3.22 percent quarter-on-quarter (QoQ), although it was 3.60 percent in Q4FY23.

On the other hand, HDFC Bank, in its financial report for the fourth quarter of the financial year, announced a 0.9 percent sequential increase in net profit, totaling ₹16,511.9 crore. In comparison, the lender posted a net profit of ₹16,373 crore in the previous quarter. Year-on-year comparisons are not applicable due to the bank's merger with Housing Development Finance Corporation (HDFC) on July 1, 2023.

The bank's net interest income (NII) grew by 2.1 percent over the previous quarter, reaching ₹29,076.9 crore from ₹28,470 crore reported in the previous quarter. For FY24, the total profit of the bank stood at ₹64,060 crore, up 38 percent YoY.

Between SBI and HDFC Bank, which blue-chip lender should you pick for long term?

As the Indian financial sector continues to grow, investors often face the dilemma of choosing between two prominent blue-chip lenders: State Bank of India (SBI) and HDFC Bank. Each bank has its unique strengths and caters to different investment philosophies. To help investors make an informed decision, we gathered insights from several financial experts.

Raj Gaikar, Research Analyst, SAMCO Securities, prefers HDFC Bank over SBI.

HDFC Bank has shown stronger advances and deposits growth compared to SBI. Deposits & advances of HDFC Bank grew by 77% & 114% respectively while SBI has seen growth of 32% & 52% in its deposits and advances respectively in the past 12 quarters. Despite a decline in CASA deposit growth, HDFC Bank's NIMs and NPAs have not been negatively affected.

The private sector banks have underperformed compared to PSU banks in the market. Currently HDFC bank is trading at a 21% discount to its 10 year average book value. This offers margin of safety to investors in the leading private sector HDFC bank. Hence investing in HDFC bank at current juncture will help investors to outperform in the long term.

Dnyanada Vaidya, Research Analyst - BFSI at Axis Securities, also likes HDFC Bank better.

While we like both SBI and HDFC Bank from a medium-long-term perspective, we prefer HDFC Bank. While the bank has underperformed post merger, we expect performance to improve over the medium term. NIMs and RoA improvement remain key re-rating triggers for the bank, and we expect multiple levers such as improving share of retail advances and replacement of high-cost borrowings of HDFC Ltd with lower cost deposits to play out, resulting in margin improvement over the next couple of years. Currently, HDFC Bank's valuations are favourable.

Jignesh Shial, Director - Research; Head of BFSI Sector at InCred Capital, as well, has picked the private sector lender.

We like HDFC Bank for its improved reach, granular book and command over pricing. We expect return ratios for the bank to improve led by maturing of newer branches and rising cross sell. We also like SBI for its superior retail reach and ample liquidity to participate in competitive pricing.

Vaibhav Jain, Head of Content & Education, Share.Market, also selected HDFC Bank for long term investing.

When choosing between SBI and HDFC Bank, it's essential to evaluate both short-term and long-term factors. In the short term, SBI stands out. It scores very high on both Momentum and Sentiment factors, indicating strong market momentum and positive sentiment from investors. In contrast, HDFC Bank appears to be out of favor, with low scores in these short-term factors.

However, for long-term investors, HDFC Bank is the more attractive option. While both banks are excellent value picks, HDFC Bank excels in quality, with significantly higher scores. This is reflected in its superior stability ratios, making it a more reliable and robust investment over time.

Favouring SBI

On the contrary, Vinod Jhaveri, Independent Analyst, Pure Technicals, has chosen SBI between the two.

Between the PSU bank SBI and private sector bank HDFC Bank, it's prudent to pick SBI for long term for a very simple reason that HDFC Bank’s credit deposit ratio is at 110% while SBI's is at 74%.

RBI in January said to all banks that C/D ratio must be between 80 and 85%. Problem that comes with RBI’s statement is, the banks that have ratio higher…have to slow down lending & increase deposits to reduce the C/D ratio. Which means, due to that, profits will fall until the ratio comes in range of 80-85%. Higher C/D ratio for HDFC Bank will not allow it to rally fast… HDFC Bank can take couple of quarters to bring this ratio in the range of 80-85.

Balanced View

Atul Parakh - CEO, Bigul, believes both lenders could be solid picks in a diversified portfolio.

Both are strong contenders, but they have different profiles. SBI has a larger government stake, potentially more influenced by policy, wider reach especially in rural areas, and lower valuation multiples, potentially offering more upside. HDFC Bank is known for consistent performance and asset quality, strong retail and digital banking presence, and higher profitability ratios. Long-term choice depends on risk appetite and view on public vs private sector banking. Both could be solid picks in a diversified portfolio.

While both SBI and HDFC Bank have their merits, the choice ultimately depends on individual investment goals and risk tolerance. HDFC Bank stands out for its strong growth metrics, favorable valuations, and long-term stability, making it a preferred choice for many analysts. However, SBI's lower C/D ratio and potential for upside also present a compelling case for long-term investors. Diversifying between both could be a prudent strategy for those seeking to balance risk and reward in their investment portfolio.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.