In the near future, ICICI Bank is expected to outperform HDFC Bank. However, a thorough assessment of their operational capabilities can only be made after ICICI Bank expands its retail branch network.
The past week witnessed a flurry of activity in the stock market as investors closely compared the performance of ICICI Bank and HDFC Bank, with a keen eye on the insights provided by Macquarie India. The research report shed light on ICICI Bank’s price-to-book value (P/BV) ratio of 2.3x, outshining HDFC Bank’s 2.0x.
Deciphering the P/BV Ratio
The P/BV ratio is a pivotal financial metric that mirrors the market’s perception of a company’s genuine value based on its tangible assets. It essentially compares the company’s market value (stock price) with its book value, calculated as total assets minus total liabilities.
This comparative narrative gained traction as HDFC Bank reported lower Net Interest Margin (NIM) earnings than its historical trend, coupled with a subdued deposit growth. NIM is a critical indicator of a bank’s financial health, representing the variance between interest earned on loans and interest paid on deposits, as a percentage of total interest-earning assets. A stable or increasing NIM is usually indicative of effective interest rate management and lending practices.
Market Response and Outlook
Following the announcement of diminished NIM earnings, HDFC Bank faced downward pressure on its stock price. As a stalwart in wealth creation and a consistent high-valuation contender in the stock market, HDFC Bank has been historically recognized for its ability to generate premium valuations compared to ICICI Bank. It has also displayed a track record of doubling its stock value approximately every five years.
Amidst this backdrop, ICICI Bank, the second-largest private lender, delivered a third-quarter profit that surpassed market expectations. This feat was primarily attributed to robust growth in retail lending and a sustained surge in deposits.
Analysis of Indian Banking Industry
Financial institutions in the Indian banking sector have shown contrasting performance in their portfolios and key metrics. The recent regulatory changes have impacted provisioning requirements, particularly for HDFC Bank, and the merger with HDFC Ltd has raised concerns regarding the short-term cost of funds. This article compares the performance and potential of ICICI Bank and HDFC Bank in light of these developments.
Provisioning and Portfolio Expansion
The unsecured portfolio of HDFC Bank demonstrated significant expansion despite a marginal decrease in margins. However, recent regulations have prompted increased provisioning, attributed to one-time exposure to alternative investment funds. The concept of provisioning in banking involves setting aside funds to mitigate potential losses on loans or financial assets. The uncertainty regarding the completion of necessary provisioning for the HDFC Ltd book acquired by HDFC Bank adds complexity to the outlook for market players.
ICICI Bank, on the other hand, reported a net interest margin (NIM) of 4.43% for the quarter ended December, accompanied by positive trends in fixed deposits and loan portfolio growth. While the fixed deposits saw a 2.9% increase, the loan portfolio exhibited an 18.7% rise from the previous year, showcasing robust performance.
Comparative Analysis and Future Outlook
Amidst the contrasting performance, the question arises: which bank stands as a better investment option? The comparison between ICICI Bank and HDFC Bank demands a detailed evaluation encompassing various factors.
The banking business revolves around effectively managing loan growth while balancing it against deposit growth. Both ICICI Bank and HDFC Bank have demonstrated resilience in their operations. However, concerns loom over the short-term impact of the HDFC Ltd and HDFC Bank merger, particularly regarding the increased cost of funds for the bank. The assumption of liabilities from the erstwhile HDFC Ltd poses a potential strain, expected to persist for the next 24-30 months. This challenge necessitates the bank to focus on reducing its average funding cost through enhanced deposit mobilization at lower costs.
Branch Network and Deposit Mobilization
HDFC Bank holds a strategic advantage with its extensive branch network compared to that of ICICI Bank. Over the past three years, ICICI Bank witnessed a 12% expansion in its branch network, while HDFC Bank experienced a staggering expansion of over 47%. The ongoing branch expansion initiatives by HDFC Bank are poised to enhance both the pace and volume of deposits mobilized, positioning the bank favorably for future growth and stability in funding costs.
HDFC Bank’s Strategic Challenges
HDFC Bank faces the task of restoring its deposit mobilization to desired levels, which may necessitate a reduction in loan growth. However, the bank’s loan machinery is currently geared for aggressive expansion, posing a potential obstacle to slowing down this trajectory. As a result, achieving its customary net interest margin (NIM) levels of 4.3% and above might take several quarters.
Short-term Resilience of HDFC Bank
Despite the short-term challenges associated with the merger, there is anticipation in the market that HDFC Bank will rebound. The bank’s ability to navigate these adjustments in the short term will be integral to its future performance.
Capital Adequacy and Loan Disbursements of ICICI Bank
ICICI Bank is expected to sustain its higher loan disbursements, contributing to robust overall performance. However, the bank confronts its own challenge of capital raising, with its capital adequacy ratio (CAR) declining to 14.61%. The CAR, expressing a bank’s capital in relation to its risk-weighted assets, reflects its ability to withstand financial shocks. In contrast, HDFC Bank boasts a robust CAR of 18.39%.
Conclusion
The comparative analysis of ICICI Bank and HDFC Bank, particularly in terms of the P/BV ratio and NIM earnings, has elicited notable market reactions. While HDFC Bank’s performance has faced scrutiny due to a dip in NIM earnings, ICICI Bank has managed to exceed market expectations, underscoring its strength in retail lending and deposit growth. These developments will likely continue to shape market dynamics and investor sentiment in the coming weeks.
The performance and strategic initiatives of ICICI Bank and HDFC Bank paint a dynamic landscape for the Indian banking industry, influenced by regulatory nuances and strategic mergers. The intricacies of provisioning and funding costs underscore the need for a comprehensive assessment to discern the growth potential and resilience of these banking giants.
In the short term, ICICI Bank appears poised to outshine HDFC Bank. However, a comprehensive evaluation of their operational strength can only take place once ICICI Bank expands its retail branches. This expansion, anticipated post-October 2026, may coincide with the appointment of a new managing director and potentially a revised strategy, setting the stage for a fresh phase of growth and competitiveness.
