The consensus among investors today is that Indian equities are expensive. And there’s a decent argument to be made that this, on the whole, is true.

However, when you dig deeper it quickly becomes clear to us that there are exceptions to this rule. Many overlooked areas exist in this market that are poised to deliver outsized returns.

Against a backdrop of expanding market share and growing demand, we believe one of the best examples of this can be found in India’s private banks.

Searching for value

According to an article published by Fidelity, India’s stock market traded at an average of 20 times expected earnings in mid-August. That was not only in line with Wall Street, but also double China’s 10 times earnings multiple at the time.

But investors should bear in mind two important pieces of context.

First, Indian equities generally carry a higher valuation for good reason.

The nation is among the most consistent in terms of long-term performance, and its growth prospects remain strong thanks to its relatively young population and rising GDP per capital. Indeed, India is expected to be the world’s third largest economy just four years from now.

Second, and perhaps most importantly, while the market as a whole may be perceived as expensive, pockets of value very much remain. It’s just about knowing where to look.

A good example of this is India’s private banking sector.

The fundamental case when it comes to these stocks is – and has long been in Mehra and Draycott’s opinion – very strong. India’s private banks have been consolidating their position and increasingly taking market share from public sector state-owned banks for years now.

Combine this expanded footprint with general growth in demand for banking services amongst an increasingly wealthy Indian population, and it’s unlikely to come as a huge surprise to learn that some of India’s private banks have been delivering impressive returns.

In fact, according to Statista, they collectively posted net profits of 962.2bn rupees (£9.2bn) in 2022 up from 694.77 bn rupees (£6.87bn) in 2021, a year-on-year jump of nearly 40%.

This isn’t just being driven by new entrants, either. The established private banks are key here.

Take HDFC Bank and Kotak Mahindra Bank, for example.

HDFC reported year-on-year revenue growth of 25.9% and net profit growth of 29.1% in the quarter ended 30 June 2023. Kotak, meanwhile, revealed a 51% year-on-year leap in consolidated profit, after tax, over the same period.

Re-rate potential

This strong performance and positive outlook alone should earn a second glance from many investors. But what makes India’s private banks so interesting right now is the fact they are being overlooked by the general market.

Perhaps this is due to the aforementioned consensus view of Indian equities as expensive. Or, in the case of the banks, concerns over the recent merger between HDFC Ltd. and HDFC Bank and a new CEO at Kotak.

Alternatively, it can be argued that some investors find comfort in popular and more recognisable stocks in the MSCI India index, such as Infosys or Unilever.

Whatever the reason though, the net result is that some private bank valuations are not rising at the same rate as earnings. As a result, these banks are trading at their lowest price-to-book ratio in years.

HDFC Bank, for example, is trading at a price-to-book ratio of 2.1x. That’s near the levels at which it traded during the Global Financial Crisis.

Likewise, with a price-to-book ratio of 3.1x, Kotak is trading at its lowest level since the end of 2013.

Ofcourse cheap doesn’t necessarily equal good and sometimes stocks trade lower because they aren’t as fundamentally strong as they once were, and it doesn’t look like that will change.

Mehra and Draycott are confident that this is not the case with India’s private banks.

They believe they are strong today; and if they continue to acquire market share from the state-owned banks and deposits continue to grow in the face of forecasts of a more-than-doubling of India’s GDP to more than US$7.5tn (£6.7tn) by 2030, they will only likely get stronger.

Both Mehra and Draycott think it will become increasingly difficult – even more so than it is today – to ignore the disparity between this strength and their valuations.

A matter of time

Entirely writing off Indian equities as expensive represents, in our view, a missed opportunity. The market continues to offer areas where balance sheet strength and positive outlook are undermined by stock market performance.

India’s private banks provide an excellent example of this, and we’re confident that early investors will enjoy oversized returns where the disparity inevitably corrects.

This article was written for International Adviser by Abhinav Mehra and Andy Draycott, co-managers of the Chikara Indian Subcontinent Fund.

On 1 May 2023, Barclays Wealth Management & Investments (WM&I) was transferred from Barclays UK to its Consumer, Cards and Payments (CC&P) division, creating a combined private bank and wealth management business.

The bank said: “The combination seeks to improve customer and client experience and create business synergies.”

The business transferred includes around £28bn ($36bn, €33bn) of invested assets, generating annualised income of around £200m.

This comes a year after Barclays expanded its private banking offering in Africa to target the continent’s high net worth market. In 2021, Barclays boosted its private banking arm after setting up in Spain.

The contractual terms between Quintet and BlackRock remain subject to final agreement, expected in the third quarter of this year. The terms of the agreement will not be disclosed.

The partnership will extend the investment capabilities of the Quintet Group, including its UK subsidiary Brown Shipley.

Under the terms of the MoU, BlackRock will provide the private banking group with access to an expanded set of investment tools, products and solutions. In the UK, Brown Shipley will draw upon a range of funds, launched exclusively for the Quintet Group’s clients, leveraging BlackRock’s scale.

It will also have access to Aladdin, BlackRock’s proprietary risk-management technology platform, which will be deployed to support risk management and reporting of Brown Shipley’s funds and discretionary solutions.

BlackRock will also provide advice on Quintet’s asset-allocation strategy, reflecting the investment objectives designed by the firm to meet the needs of its clients, including in the UK.

While retaining its open-architecture approach, Quintet will have access to an extended product range via BlackRock, benefiting from its support in the selection and monitoring of third-party managers.

‘Key driver’

Chris Allen, Quintet Group chief executive, said: “We are delighted to announce our intent to partner with BlackRock. We selected BlackRock because of the depth and quality of their investment expertise, the scale of their investment reach and the strength of their risk-management platform. All of that will facilitate the work of our investment specialists, complementing and enhancing our client proposition.

“Our decision to partner with BlackRock will support our ability to remain on the front foot of product and portfolio innovation,” he said. “That, in turn, will help us serve our clients even better – with increased reach, efficiency and flexibility – as we continually strive to deliver robust client outcomes.

“As today’s announcement demonstrates, we are focused on strengthening the foundation of our group to support sustained growth. That includes through our broader strategy refresh – a series of measures we will continue to implement consistently over the course of this year and 2024 – designed to create additional economies of scale, reduce organisational complexity and further enhance collaboration in service to our clients.

“Extending our investment capabilities, with BlackRock’s expertise, will prove a key driver of our journey to sustained profitability and long-term growth, as we seek to become an even more efficient firm, where client interests are at the heart of everything we do.”

The launch follows HSBC Group introducing global private banking in Thailand in 2021, and in Mexico, UAE, and Chengdu, Hangzhou and Shenzhen in mainland China in 2022.

The new business is aimed at clients with investable assets of more than $2m (£1.58m, €1.84m).

HSBC Group has also been strengthening its presence in India including acquiring L&T Investment Management Limited in 2022, now called HSBC Mutual Fund, and enhancing digital, payment, lending and international banking services, and providing life insurance services through its joint venture, Canara HSBC Life.

Surendra Rosha, co-chief executive of HSBC Asia Pacific, said: “India’s acceleration as one of the world’s largest and fastest-growing economies is supported by its demographics, digitisation and an enabling policy infrastructure.

“The launch of our new global private banking business will complement HSBC’s leading retail and corporate banking offerings. Ultimately, we are strengthening our presence in India and diversifying our capabilities in Asia.”

The programme will deliver in-person roundtable events on investing and wealth management topics across Hong Kong and Singapore, and also features digital experiences through the women and wealth private community platform and online financial education courses on topics including the foundations of investing, sustainable investments and venture capital

It aims to empower women in their individual wealth management journeys that will encourage knowledge and experience-sharing within the region.

Kam Shing Kwang, chief executive for JP Morgan Private Bank in Asia, said: “JP Morgan Private Bank’s partnership with Sophia is focused on serving the unique needs of women in Asia as they create and inherit wealth faster than ever before, at a world leading compound annual growth rate of 10.6%. Through this partnership, we continue to supplement our ongoing efforts to bring together like-minded women to inspire and help one another.

“The programme complements JP Morgan’s strong stance on empowering women throughout each important period of their lives and prioritising their financial health, while helping them tap into the vast investment opportunities – whether their goal is to have liquidity, or to build and preserve wealth.”

Launched in January 2022 by gender finance veterans Christine Yu, Nicole Denholder and Tanya Rolfe in Hong Kong and Singapore, Sophia is a financial education platform providing digital, in-person and livestreamed financial and investing literacy programmes made for women.