Whom To Bank On?

Two banking companies which started off their journey simultaneously have created a niche for themselves on the Indian banking scene. Vidrum Mehta provides a comparatively analysis of the strengths and weaknesses of ICICI and HDFC Bank in order to help you choose the right stock among the two for your portfolio.

The Indian banking sector has evolved very well over the years. In fact it is the resilience of our banking sector and the conservative policies of the Reserve Bank of India that have helped us withstand many shocks emanating from the western financial world in the past. From the sub-prime crisis of the US to the economic mishaps of the European world, we have been able to face such jolts in a much better manner. While public sector banks have been at the core of India’s economic growth, private banking players too have not been far behind. In fact they have been more aggressive than their public sector peers and this has ensured their growth at a much faster clip. It is this speed of growth that has seen some of them emerge among the largest banking institutions of India over a very short period of time.

So if you were to look at investing in some of these private banking players, so as to become a stakeholder in companies which ensure a better value creation in future, which ones would you select?

Two names which usually crop up in any discussion as far as India’s private banking sector is concerned are HDFC Bank and ICICI Bank. One very interesting fact about both these banks is that they were incorporated in the same year (1994). Over the past 18 years of their existence both these banks have managed to find a place among the most important financial institutions on the Indian economic scene.

If you were to compare them on a peer to peer basis, it definitely doesn’t come as surprise that both banks offer almost similar products and services. While HDFC Bank takes pride in communicating to its customers that it understands their world through its tagline “We understand your world”, ICICI Bank is no different when it says “Khayaal Aapka”. So which one do you think is more suitable to find a place in your portfolio? Here are some insights which offer you the answers to that very important question.

Relative to Size

The Market Capitalization of HDFC Bank is around Rs 122000 crore while that of ICICI Bank is around Rs 100000 crore. Even though the former has a higher market cap the weightage for ICICI Bank is slightly higher in the BSE Bankex. This is because the free float for ICICI is higher than that of HDFC Bank. As on 31st December 2011, promoters of HDFC Bank held around 23.20 per cent of the total shares while in case of ICICI the promoter holding is zero per cent.

Business Approach

Both the banks have a different approach of doing business. HDFC Bank has a consistent and stable growth approach while ICICI Bank is much aggressive in its activities. The aggressiveness of ICICI Bank can be gauged from the way it has gone about with some of its inorganic expansion plans. ICICI Bank spent Rs 3040 crore in 2010 to acquire Bank of Rajasthan (BOR) while HDFC bank had spent around Rs 9510 crore in the year 2008 to acquire Centurion Bank of Punjab (CBOP). Point is, ICICI Bank acquired BOR at a Price to Book Value (P/BV) of approximately 5 times while HDFC Bank acquired CBOP at P/BV of approximately 1.2 times. Hence, HDFC Bank’s acquisition was at a much cheaper rate than that of ICICI Bank.

Management Capability

The management of HDFC Bank reflects a very good sense of confidence in the business. Aditya Puri as the Managing Director has been at the helm of affairs at this bank since 1994 which shows that the Board of Directors’ has a good amount of faith and a lot of conviction in his vision. A strong management, coupled with robust business growth has created a good brand image for the bank over the years.

On the other hand, after K V Kamath stepped aside from the active management of the bank, its top management has looked pretty shaky despite the good managerial skills of Chanda Kochhar its current Managing Director. In fact there have been quite some exits at the top management level in recent times which we do not see to be an encouraging sign. False rumors have triggered a run on its deposits and have hurt its brand image in the past. ICICI Bank’s business growth has been quite decent, but because of the negative impression of its brand there is a lesser amount of investor confidence and hence the stock is available at a cheaper valuation compared to other private players. On a Price to book value basis ICICI Bank is available at 1.6 times while HDFC bank available at 4 times and Axis bank at 2.17 times.

Historical Business Perspective

The results of a comparative analysis of the businesses of both the banks over the past eight years are quite surprising. Deposits of HDFC Bank went up at a CAGR of around 32 per cent while its Advances increased at a CAGR of around 38 per cent. On the other hand Deposits of ICICI Bank increased at a CAGR of around 21 per cent while its Advances increased at CAGR of around 19 per cent.

This clearly shows that growth in terms of business is much higher in case of HDFC Bank than ICICI Bank. This growth in business is also reflected in the bottomline performance of the banks. Over the past eight years, HDFC Bank’s PAT grew at a CAGR of around 33 per cent, while ICICI Bank posted a CAGR of around 20 per cent.

Current Scenario

In a rising interest rate regime the Net Interest Margin (NIM) for banks usually gets impacted. But when we look at NIM’s of both these banks they have been more or less stable in nature over the past six quarters which is commendable. HDFC Bank’s NIM in the last six quarter has remained in the range of 4.1 to 4.2 per cent while that of ICICI Bank was in the range of 2.6 to 2.7 per cent.

One reason behind the higher NIM of HDFC Bank is that around 51 per cent of the total loan book comes from the Retail lending segment while that for the ICICI bank it is around 34 per cent. Usually loans to retail clients are given at a higher rate as compared to corporate clients. Another reason behind this could be the low cost CASA (Current and saving account) deposits which account for 47.7 per cent of the total deposits in case of HDFC bank while that for ICICI they stand at 43.6 per cent as on 31st December 2011.

One major risk in the current business environment particularly in case of banks is the fear of deterioration in the asset quality. ICICI Bank’s Net NPAs are showing a declining trend even in a rising interest rate environment which is very commendable. From 1.39 per cent in December 2010 its Net NPAs stood at 0.83 per cent in December 2011. But when we look at HDFC Bank its Net NPAs have been more or less stable at around 0.2 per cent and are also at a very low level since the last five quarters.

Another factor to consider is the cost to income ratio which further determines the operational efficiency of banks. For the December quarter of 2011, the cost to income ratio for ICICI Bank stood at 41.5 per cent versus that of HDFC Bank’s 46.7 per cent. HDFC bank has a higher number of employees when compared to its number of branches and this could be one of the reasons as why the ratio for the bank is higher. On the operational efficiency front ICICI Bank looks to be better than HDFC Bank. Even in terms of Total Assets ICICI Bank has an edge over HDFC Bank. As on 31st December 2011, total assets of ICICI Bank stood at Rs 459200 crore while that of HDFC Bank stood at Rs 335486 crore.

Future Outlook

In terms of business growth, both these banks have performed well above the RBI’s projections. The RBI had forecasted a loan growth of around 16 per cent and a deposit growth of around 15.5 per cent for FY12. As on 31st December 2011, HDFC Bank’s loans grew by 22 per cent while deposits were up 21 per cent. On the other hand ICICI Bank’s loans grew at 19.1 per cent while deposits increased by 19.7 per cent. One notable point here is that despite having larger number of branches the growth in business for ICICI Bank is less compared to HDFC Bank. We believe that going ahead both the banks will continue to grow at a decent rate which would be much better than the Industry growth. With interest rates now in the reverse mode (even as we write this piece the RBI had brought down the Repo rate by a good 50 bps) the banking sector is likely to witness a good growth momentum going forward.

The ICICI Bank stock is more of a traders’ fancy while HDFC Bank is an investors’ fancy. This is because the ICICI Bank stock is highly volatile compared to its peers. The Beta of the ICICI Bank stock is around 1.88 while that of HDFC Bank is only 0.88. Therefore risk averse investors’ will always bet on HDFC Bank while risk takers may go for ICICI Bank which could give them good returns depending on the share price movement.

The Dividend yield of ICICI Bank stands at 1.59 per cent while that of HDFC Bank is 0.6 per cent. From the valuation point of view, HDFC Bank is available at a very high valuation as compared to ICICI Bank; the former will command premium as it has been a stable and good performer over the past. On the Price to Earning front, HDFC Bank is available at 25 times while ICICI Bank is available at 16.57 times. On the Price to Book Value front HDFC Bank is available at 4 times while ICICI bank is available at 1.63 times. ICICI bank is commanding a lower valuation despite having various subsidiaries like ICICI Prudential Life Insurance, ICICI Lombard General Insurance, ICICI Securities, ICICI AMC, ICICI Venture Fund Management etc. While HDFC bank has only two subsidiaries namely HDFC Securities and HDB Financial services. HDFC Bank itself is a subsidiary of HDFC. Even with a higher number of subsidiaries ICICI bank is available at a lower valuation than HDFC Bank which could be due to the muted performance of its subsidiaries.

Both the banks have a good growth potential going forward which will result into a stock price up move but we are more comfortable with HDFC Bank which has an edge over ICICI Bank on various parameters that we have compared above.