ICICI Bank vs HDFC Bank: How India’s top two private lenders have performed in Q4

• India’s two largest private sector lenders have reported robust growth in loans and deposits, while continuing to see asset quality improvements.
  
• Despite delivering better performance than HDFC Bank in both Q3 and Q4 FY23, the ICICI Bank stock has underperformed its peers over the last six months.
  
• While analysts maintained their bullish outlook on both the lenders, the impact of the merger of HDFC into HDFC Bank and deposit growth for both the lenders remain the key monitorables going forward.
  

India’s largest private lenders ICICI Bank and HDFC Bank have both declared their March quarter and FY23 results, reporting robust loan growth and asset quality improvements. While HDFC Bank is the larger of the two lenders, ICICI Bank is continuing on its trajectory of closing the gap with its larger peer.

Despite delivering better performance that HDFC Bank in both Q3 and Q4 FY23, the ICICI Bank stock has underperformed its peer over the last six months – ICICI Bank’s shares are down over 2% in the last six months, while HDFC Bank’s shares have risen by over 16% in the same period. The underlying Nifty Bank index has risen by 3.7% in this period.

ICICI Bank is also currently trading at a discount to HDFC Bank – while ICICI Bank is trading at 2x of its FY25 estimated book value, HDFC Bank is trading at 2.5x of its FY25 estimated book value.

With their Q4 numbers now in, here’s how India’s top three private banks stack up against each other:

Particulars	ICICI Bank	HDFC Bank
Net profit	₹9,122 crore	₹12,595 crore
Net interest income	₹17,667 crore	₹23,352 crore
Pre-provisioning operating profit	₹13,866 crore	₹19,962 crore
Net interest margin	4.9%	4.3%

Source: Company reports, as at Q4 FY23

Loan growth remains in the fast lane, asset quality continues to improve

Both the private sector lenders maintained the strong momentum in loan growth despite rising interest rates. While HDFC Bank reported a 17% YoY growth in its loans during Q4 to ₹16.6 lakh crore, ICICI Bank was a step ahead with 18.7% YoY growth in its loan book to ₹10.2 lakh crore.


For HDFC Bank, commercial and rural loans grew the fastest at 29.8% YoY, followed by retail loans at 19.3%. Retail loans account for 39.3% of HDFC Bank’s total advances.

On the other hand, retail loans led the growth in ICICI Bank’s loan book, growing by 21% YoY, followed by small and medium enterprise (SME) loans at 19% rise.

In terms of asset quality, both the lenders continued to see improvements. Here’s how they stack up against each other in terms of non-performing assets:

Particulars	ICICI Bank	QoQ change	HDFC Bank	QoQ change
Gross NPA	2.81%	-26 bps	1.12%	-11 bps
Net NPA	0.48%	-7 bps	0.27%	-6 bps

Source: Company reports | NPA ratios as at Q4 FY23 | Note: A decline in NPA ratios is a positive change

HDFC Bank remains unmatched in terms of deposit growth

HDFC Bank continued to maintain its lead over all its peers in terms of deposit growth – the lender’s deposits grew 20.8% YoY to ₹18.83 lakh crore. Despite being far ahead of its peers, the lender said it remains focused on attracting retail deposits.

On the other hand, ICICI Bank’s deposits grew at a much slower pace of 10.9% YoY to ₹11.8 lakh crore.


Key monitorables: Deposit growth, and HDFC’s merger into and with HDFC Bank

Going forward, the brokerage consensus is bullish on both the private lenders. Analysts at Motilal Oswal expect both the banks to deliver a return on equity of 17.3-17.7% in FY24 and FY25.

“We believe that the long-term investment thesis of HDFC Bank remains intact. The bank is well-capitalized, has strong execution capabilities, can manage its growth levers along with its best-in-class asset quality across cycles,” said a report by Sharekhan.

Progress on the merger of HDFC into and with HDFC Bank is a key monitorable, according to brokerages. The lender expects it to complete by July this year, which could$4.

Apart from this, another aspect to keep an eye out for is HDFC Bank’s operating expenses – the lender’s focus on expanding its branches within 2 kilometres of every customer has seen its operating expenditure rise by 32.3% to ₹1,343 crore in Q4.

“Historically, the relationship between branches and business is not strongly correlated,” said a report by Kotak Institutional Equities, underlining the concerns of these operating expenses eating into the lender’s profitability.

“We believe that the long-term investment thesis of the bank looks solid,” the brokerage added.

Deposit growth remains another key monitorable for both ICICI Bank and HDFC Bank, with brokerages keeping on eye on how long these growth rates can be sustained for, especially in HDFC Bank’s case wherein the lender has outpaced its peers for the past few quarters.

With that one monitorable aside, though, the sentiments are largely positive for ICICI Bank.

“ICICI Bank has reported a stellar set of earnings on most fronts. It posted a substantial improvement in net interest margins, return ratios, and asset quality. A strong digital push, focus on risk-calibrated operating returns, and a strong Balance Sheet will result in a re-rating in the stock,” said a report by Nuvama Institutional Equities.

All in all, an average of brokerage estimates puts the target price for HDFC Bank over the next 12 months at ₹1,983, presenting an upside of 17%. On the other hand, the average target price for ICICI Bank stands at ₹1,124, which is an upside of 24%.

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