Synopsis–Investors would recollect that the last time ICICI Bank had reported better growth than HDFC Bank was in the mid-2000s when the former had taken an aggressive stance of growing the wholesale book.
ET Intelligence Group: The stock of ICICI Bank gained nearly 4% on Monday after the bank reported better loan book growth — retail and overall — than the larger peer HDFC Bank for the March quarter with improving asset quality. Given an additional COVID provision of Rs 1,000 crore, the bank is well placed amid the second wave of the pandemic. While it has been able to reduce the valuation gap with HDFC Bank over the past few quarters, the latter may continue to attract a better valuation due to higher asset quality on a larger loan base.
For ICICI Bank, domestic loan book grew by 17.7% year-on-year to nearly Rs 7 lakh crore while the retail book rose by 20% to Rs 4.9 lakh crore at the end of March 2021. In the case of HDFC Bank, the growth was slower at 14% in the total loan book at Rs 11.3 lakh crore and at 6.7% in the retail book at Rs 5.3 lakh crore.
ETMarkets.comInvestors would recollect that the last time ICICI Bank had reported better growth than HDFC Bank was in the mid-2000s when the former had taken an aggressive stance of growing the wholesale book. The strategy affected its asset quality over the following decade.
This time around, the bank seems to be on a stronger footing as the growth is backed by the retail loan segment, better interest margin and higher provisioning.
“A lot is more different compared with the ICICI in the past when asset quality cycles, margins were very low at sub 3% and provision coverage ratio (PCR) was low at around 50% versus over 3.7% margins and PCR of around 78% today,” said Suresh Ganapathy, Associate Director, Macquarie Capital.
ICICI Bank has also focused on improving the quality of the loan assets in terms of the ratings. The proportion of loans rated AA- and above increased to 50.3% at the end of March 2021 from 37.2% four years ago while that of loans rated BB and below fell to 1.5% from 9.2% during the period.
While the second wave of the pandemic and the subsequent local lockdowns and trade restrictions in several parts of the country may increase uncertainty in the coming quarters, each of the two banks have increased provisions.
“Banks have built in elevated provisions to offset the impact. Asset quality has surprisingly panned out better so far. Front-line banks have greater capacity to absorb asset quality losses, if any, from the second wave,” mentioned Nomura Research in a sector report.
According to Macquarie’s projections, ICICI Bank trades at an FY23 estimated price-book (P/B) multiple of 2.4 compared with 2.7 for HDFC Bank. Though the former bank has reduced the valuation gap significantly over the past few quarters, the latter may continue to retain better valuation given higher asset quality on a larger loan book and higher interest margin. For HDFC Bank, net interest margin (NIM) was 4.2% and gross nonperforming assets (GNPA) ratio was 1.3% in the March quarter. ICICI Bank’s NIM and GNPA were 3.8% and 5.3% respectively.
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