HDFC Bank, ICICI Bank, SBI and other Indian banks are rising on global stage. but investors are yet to join the party

One year after the mega merger of the erstwhile HDFC twins, Indian banks have cemented their spot further on the global stage. Each of the three Indian names—HDFC Bank, ICICI Bank and State Bank of India (SBI)—in the top 20 globally by market capitalization has improved their rank in the past year. 

What's more, the top 100 has five Indian names, whose share in the combined market value of this elite set is also rising every year, a Mint analysis showed.

The combined market capitalization of the three Indian banking giants in the global top 20 has surged by 32.5% in the last one year, as compared to a 22.3% increase in that of the other global giants currently in the list.

HDFC Bank emerged as the frontrunner, climbing to the ninth position with $158 billion in market capitalization, up from 11th place a year ago. HDFC Bank's ascent to the top 10 began on 13 July 2023, the record date for determining the shareholding following the official merger with HDFC Ltd. This strategic move boosted HDFC's value from $117.4 billion on 3 July 2023 to $151 billion on 13 July 2023.

HDFC Bank is followed by ICICI Bank at $100.4 billion and SBI at $88.4 billion. SBI joined the top 20 on 24 July 2023, and has now jumped to the 18th place. ICICI Bank has the 15th spot, also up by one spot in a year.

The top five banks by market capitalization are all based in the US and China. JPMorgan Chase & Co. boasts the largest market cap out of the entire list at nearly $600 billion, followed by Bank of America Corp. with a valuation of $320 billion. The highest ranked Indian bank, HDFC Bank, trails JP Morgan Chase & Co. by $442 billion.

“India's growing economy, expected to rise at 7-8% in coming years, positions banking and financial services as a key beneficiary. The top large-cap banks such as SBI in the public sector space and ICICI Bank and HDFC Bank in the private sector are likely to thrive due to their size and experience,” said Kranthi Bathini, director of equity strategy at Wealth Mills Securities Pvt. Ltd.

India’s growing clout on the global stage is further underscored by the rising share of its banks in the top 100. The combined contribution of five Indian players—the other two being Kotak Mahindra Bank and Axis Bank—in the top 100 has surged from 4.4% to 6.4% over the last five years.

Industry experts are optimistic about the future of Indian banks. Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research, predicts further gains for the sector, particularly if inflows by foreign institutional investors continue. He also highlights the potential for sector rotation within private banks, with HDFC Bank likely to deliver a 15% return in the next few months.

A wave of financial strength is sweeping through the banking sector in terms of asset quality and revenue growth. In terms of financial strength, this growth has been led by private banks, which have beaten their public sector counterparts in the last three fiscal years in terms of net interest income (NII) and revenue growth. For private banks, the NII witnessed a median growth of 19.6% compared to 12.2% for state-run banks in the last three years. Likewise, state-run banks' revenues grew at 16.8% compared to around 21% for private sector entities during this period.

Analysts such as Anand K. Rathi, co-founder of Mira Money, believe that the Indian banking sector's profitability is just beginning its ascent. He anticipates significant market-cap growth, especially for private banks, in the coming years. “I will not be surprised if HDFC Bank goes on to become one of the top five banks, while ICICI Bank breaks into the top 10 banks in the world,” he added.

However, all this doesn't seem to have worked in the favour of investors. The sector has fallen short of the headline index's performance in the past five years: The Bank Nifty was up only 69.2% in the last five years against a 104% rise in the Nifty 50 index. All this while, the Nifty Private Bank and Nifty PSU Bank have delivered returns of 53% and 123%, respectively.

The underperformance of Bank Nifty in the past five years can be attributed largely to the HDFC-HDFC Bank merger, significant internal changes in a few private banks, and challenges with bad loans in the past, said Rathi.

“However, recent trends indicate a large-scale clean-up of bank balance sheets, a decrease in bad debt, and positive credit off take,” he added. “This suggests that private sector banks are unlikely to underperform the Nifty in the next two-three years. Recent market movements already hint at this shift, and we can expect Bank Nifty to not only recover from its underperformance but potentially outperform the Nifty in the coming years.”