Glamorous ICICI vs lean HDFC

If the ‘India growth story’ must roll on, by extended logic, the banking sector will have to be the bulwark that pulls it forward. Given that most public sector banks continue to be viewed in the market as dancers with two left feet, it is the private sector banks that bask in the attention of the bourses.

A common question that I have faced from management students while lecturing them is : Why does HDFC Bank command a premium valuation over ICICI Bank? Given that ICICI Bank advertises itself and its services far more aggressively, the question, by itself, is not entirely misplaced.

But a quick look at facts tells us why HDFC Bank leaves ICICI Bank well behind in the valuation game or the bourse sweepstakes. While the numbers are out in the open for all to see and interpret, let us focus on qualitative superiority through a one-on one SWOT (strengths, weaknesses, opportunities, threats) snapshot.

While both banks enjoy decent brand equity, HDFC Bank has a lean and mean look to it compared to a relatively bigger and flabbier ICICI Bank. This is well reflected in HDFC Bank’s lower NPAs and higher CASA (current and savings accounts), which significantly lowers its cost of deposits. This, in turn gives HDFC Bank superior NIMs (net interest margins), a vital parameter while evaluating banks.

While ICICI Bank was undoubtedly burdened by the legacy of the erstwhile ICICI, its NPA levels which are creeping upwards again and do not provide too much comfort.

Again, ICICI Bank has a disproportionately large retail exposure as compared to HDFC Bank, and retail being the most vulnerable economic segment, the possibilities of trouble ahead when the inevitable economic downswing occurs cannot be overstressed. The retail crack lines already seem visible to the discerning.

One of HDFC Bank’s selling points is its superior ROE (return on equity). And it is here that the men get separated from the boys, however overgrown they may be. A point to ponder over here would be the wary reaction of the stock market when ICICI Bank announced its equity dilution plans as compared to its relative nonchalance when HDFC Bank did.

The moot question here is, against the backdrop of unimpressive results, did ICICI Bank get its timing wrong in announcing an equity dilution? Whatever the answer to that may be, what will happen to its already not-so-impressive ROE herefrom merits attention .

Needless to say, HDFC Bank too has its weak spots. For one, its operating cost curve is unflattering even when compared to ICICI Bank. Secondly, a slowdown in credit demand will hurt it too, just as it would, any other bank.

Yet, at the end of the day, on pure fundamental parameters and for my money, HDFC Bank appears a far safer bet than ICICI Bank.

(Ashok Kumar heads investment advisory firm Lotus Knowlwealth)