A tale of three banks: The outperformer, the attractive and the high-valued

• Kotak Mahindra Bank’s valuation premium vs other private sector peers has been compressing, say analysts.
• ICICI Bank is better positioned among peers due to lower exposure to riskier sectors and manageable share of SME/unsecured retail loans.
• HDFC Bank in spite of seeing slower headline growth is poised to deliver value due to the benefits the merger brings.

India’s private sector banks have been having a dream run at the stock markets thanks to lowering delinquencies and improving profit profile for the last two years. That seems to have changed in the first quarter, with asset quality now in focus, and their valuation metrics having changed.

Kotak Mahindra Bank’s stock fell sharply in Monday trade by over 3%, as its peer ICICI Bank rose marginally to hit ₹1,000 in today’s trade. HDFC Bank too was trading marginally higher – after all the earnings were announced during the weekend.

Kotak Mahindra Bank: At a premium no more

Kotak Mahindra Bank has been outperforming the banking index for the last few quarters, but it might not be able to keep up the lead, say analysts.

“We believe Kotak’s valuation premium vs other private sector peers has meaningfully compressed over the last couple of years - trading at 2.4x FY25e price-to book value for core banking business. Meanwhile, Kotak has accelerated growth and continues to report best-in-class return on assets,” says J M Financial which has maintained a buy rating with a target price of ₹2,205.

Kotak’s net interest margins fell by 18 basis points quarter on quarter, but that’s been largely expected due to rising cost of funds. Analysts however are concerned about asset quality.

“There was a substantial rise in slippages / credit costs, which was partly due to higher share of unsecured loans – now at 10.7% vs 7.9% YoY,” said ICICI Securities, which maintains a Hold rating with target price of increased to ₹2,000 and sees a sharp deterioration in asset quality, as a downside risk.

Nuvama also says that the QoQ decline in core pre-provision operating profit (PPOP) is the highest so far amongst peers, adding that its unsecured loans are growing faster.

“With softcore PPOP and valuation higher-than-peers, we retain ‘hold’. Our target price remains unchanged at ₹2,140. We expect pressure on cost of funds (CoF) to accelerate with sweep deposits,” says Nuvama.


ICICI Bank: Better than peers

ICICI Bank however is better positioned amongst peers due to lower exposure to riskier sectors and manageable share of SME/unsecured retail loans, as per Jefferies which believes its valuations are attractive.

“Asset quality trends are showing signs of normalisation as lower recovery/upgrades are increasing net slippages, even as gross slippages fell 9% YoY. This reflects that underwriting on new loans is holding up well despite rise in unsecured/ SME loans and benefit from higher than normal recoveries/upgrade will settle at lower than highs of FY23,” said Jefferies.

Nuvama also shares the optimism as it retained its buy rating with a target price of ₹1,180, valued at 2.8 times its core book value FY25E .

“The bank (ICICI) has outperformed peers again on the back of core pre-provision operating profit (PPOP) and balanced growth. With consistent and better-than-peer performance for 14 quarters, ICICI Bank is our top pick,” it says.

This bank too will come off its highs, as analysts believe that its spreads have peaked. However, its return rations are expected to remain strong going ahead, with a double digit earnings growth ahead.

“Having outperformed the broader banking index by c.200%, over the last five years, we think the current multiples broadly reflect the turnaround at the bank and the strength of its liability franchise,” said a report by Systematix Institutional Equities.

JM Financial also says that its asset quality continues to be in fine fettle with credit costs at 0.53% which unlike recent trends did not include any contingency provisions – implying gradual normalisation of credit costs vs the suppressed levels in the last few quarters.

Banks	Profit change (QoQ)	Net NPA ratio	Provisions
Kotak Mahindra Bank	-9.2%	0.40%	₹365 cr
ICICI Bank	5.7%	0.48%	₹1,292 cr
HDFC Bank	-0.7%	0.30%	₹2,860 cr
Yes Bank	69.3%	2.4%	₹476 cr

Source: Exchange filings

HDFC Bank: The merged benefits

HDFC Bank’s net profits which were marginally lower sequentially, and its pre-provisioning operational profit (PPOP) declined on weak core income.

A research report by Choice, said that its core PPOP growth slowed down to a six-quarter low of 10.4% YoY. It also reported a weak growth in corporate book, while retail book continued to grow at high teen digits.

But the merged banking behemoth has a long run up ahead due to the advantages that the merger with HDFC brings.

“We view the bank’s focus on expanding liability franchise to support lenders for sustaining the business growth trend. The bank is determined to continue the pace of branch expansion amidst the benign credit cost cycle,” says Choice, with an ‘outperform’ rating ₹2,035 per share.

Nomura has introduced its merged model estimates, and maintains a buy rating HDFC Bank at 2.5 times June 2025 forecast a target price of ₹1,970. It however builds in a softer headline loan growth for the bank.

“While management remains confident of sustaining around 18% medium-term loan growth, we build in a slightly lower headline loan CAGR of 17% over FY23-26 forecast,” says Nomura.