HDFC Bank Ltd.'s price-to-book ratio is close to its lowest level since the reverse merger with HDFC Ltd took effect in July 2023, putting the focus on how the market values the country's largest private-sector lender after a prolonged decline in its shares.
The bank's price-to-book ratio stood at 1.8052 times on Wednesday, according to Bloomberg data, close to a recent low of 1.7454 times recorded on Sept. 9. The ratio measures a bank's market value against its book value, or the value of its net assets recorded on the balance sheet.
The valuation is also below those of ICICI Bank Ltd. and Kotak Mahindra Bank Ltd., although it is marginally above Axis Bank Ltd., according to Bloomberg's peer comparison. The figures put HDFC Bank's valuation in focus as its shares continue to underperform the banking index.
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The price-to-book (P/B) ratio compares a company's market value with the value of its net assets recorded on the balance sheet. A ratio of 1.81 times means investors are paying Rs 1.81 for every Rs 1 of HDFC Bank's book value. Investors use the metric to assess how the market values a bank relative to its net worth. A lower ratio does not necessarily mean a stock is undervalued, as it can also reflect concerns about future growth, profitability or asset quality.
HDFC Bank's Valuation Compared With Peers
HDFC Bank's price-to-book ratio of about 1.81 times compares with 2.57 times for ICICI Bank, 2.33 times for Kotak Mahindra Bank and 1.77 times for Axis Bank, according to Bloomberg data.
The ratio indicates how much investors are paying for each rupee of a bank's book value. At 1.81 times, investors are valuing HDFC Bank at about ₹1.81 for every Rs 1 of book value.
Bloomberg's peer comparison puts HDFC Bank's five-year average price-to-book ratio at 1.32 times. The current ratio is above that average, so the recent low should not be confused with a valuation below its five-year average.
HDFC Bank Shares Trail Banking Index
HDFC Bank's shares have underperformed the Nifty Bank over the periods shown in the data. The stock fell 30.68% over one year, compared with a 1.54% decline in the banking index. Over six months, HDFC Bank fell 12.72%, while the Nifty Bank declined 1.21%.
Over three months, HDFC Bank lost 15.15%, compared with a 5.32% fall in the Nifty Bank.
The share-price performance provides context for the decline in the bank's valuation multiple. However, the price-to-book ratio alone does not establish whether the stock is undervalued. That assessment also depends on the bank's financial performance, future growth and the risks investors see in its business.
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