ICICI Bank vs HDFC Bank: Getting Into compounding band says Jefferies


ICICI Bank’s de-risking initiatives have kept it in good stead with an impact on potentially manageable asset quality. One not-so-well-regarded aspect is that its operating profit grew 19-20% in fiscal 2019-20 and 18% year-on-year in H1 FY21. It narrowed the gap with HDFC Bank, and with the growth of retail and corporate banking And the corporate ecosystem with a normal cost of credit, ICICI Bank can grow normal profits by 17-20%. CASA’s rapid growth is fundamental for ICICI Bank.

Achieving healthy operating profit growth:

It is interesting to note that ICICI Bank was able to improve the growth in its operating profit (non-treasury and dividend income) to 19% / 20% during FY 2019/20 against -11% / +8% during FY 2017/18. Even through the first half of fiscal ’21, operating profit was up 18% year-over-year. This was supported by healthy growth in retail loans, and better underlying growth (NIMs and fees). In fact, the better income growth has helped the company continue to invest in distribution. As a result, ICICI Bank also closed the gap in this aspect with HDFC Bank, which has been holding steady for a longer period. Going forward, Jefferies believes that ICICI Bank will be able to drive demand for retail loans and even deepen relationships with corporate clients through its ecosystem banking initiatives.

Satire initiatives to keep the impact of Covid in check:

ICICI Bank has increased the share of loans rated A and above in its loan mix from 63% in fiscal 2018 to 72% now. This has led to a higher share of retail loans and higher payments to companies rated A and above. In retail lending, a larger proportion of loans are to old/existing customers and income groups with pay-per-view. Hence, Jefferies expects asset quality pressures to be manageable; After providing 1.5% of loans in Covid provisions, management now expects provisioning costs to return to normal. Jefferies expects provisions to be approximately 2.5% in FY21 and 1.5% in FY22 — each 20 basis point change in the cost of credit will impact FY22E earnings by 6%.

Recovery in CASA growth is key:

An area where Jefferies expects ICICI Bank to improve is CASA growth which saw it moderate to 12% yoy in Sept-20, while HDFC Bank improved momentum to 27% yoy. While ICICI Bank’s cost of financing is among the lowest in the sector, better CASA growth will help drive growth on the lending side as well.