The growth in stock prices of any bank will be driven by the following:
1- Credit growth in economy
2- Bank’s ability to maintain or grow market share
3- Valuation adjustment
So you can see stock price appreciation for a bank should have nothing to do with its size. ICICI bank, despite its large market cap, is still the best performing bank, on the basis of stock price return, compared to any small-mid size bank (not including NBFC), over any time period. Conversely, you can have the stock price of a small-midsize cap bank do nothing for a long time, if they continue to lose market share or trade at above-mean valuations.
Coming to HDFC bank, they have been growing their book size at 20-22%, on an average, which is well above India’s historical credit growth (12-14%). It’s because of their operational efficiencies and gain in market share.
India’s credit to GDP is among the lowest in the world and as per many experts we are at the start of a credit boom (see the chart below).
So without getting into too much detailed analysis, big picture looks very promising for banks like HDFC. Even if HDFC can maintain their market share (which they will and even grow further), they should be able to grow their book at 16-18% (even with a large base) which should translate into the similar CAGR return on stock prices in the long run.
Valuation-based upside is just bonus.
Market cap is just a number. 15-20 years ago, we had very few companies trading at 1 lakh market cap and it was considered to be extremely large. Now we have close to 100 companies with more than 1 lakh market cap. And who knows what will happen in next 15-20 years.
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