In the past week, the stock market has been actively comparing ICICI Bank and HDFC Bank, notably focusing on Macquarie India’s call. The report highlighted that ICICI Bank’s price-to-book value ratio stood at 2.3x, surpassing HDFC Bank’s at 2.0x.
Understanding the price-to-book value ratio (P/BV) ratio is crucial—it reflects the market’s perception of a company’s true worth based on tangible assets. It is a financial metric that compares a company’s market value (its stock price) to its book value (total assets minus total liabilities).
This comparative narrative started when HDFC Bank reported lower NIM earnings than its usual trend, and it could only garner a fraction of its usual deposit mobilization. Net interest margin (NIM) is another critical metric that indicates the health of a bank. It is the difference between interest earned on loans it gives out and interest paid on deposits it raises from the public, expressed as a percentage of total interest-earning assets. A stable or rising NIM is usually a sign of efficient interest rate management and lending practices.
HDFC Bank’s stock also came under pressure after the NIM earnings were announced. The lender has been recognized as one of the strongest wealth creators in the stock market, and has traditionally commanded a higher valuation premium compared to ICICI Bank. The bank’s stock has a history of doubling every five years approximately.
Meanwhile, ICICI Bank, the second-largest private lender, delivered a third-quarter profit that exceeded market expectations, driven by robust loan growth in retail lending and a consistent rise in deposits.
Despite a slight decrease in margins, the unsecured portfolio exhibited significant expansion. Recent regulations led to a slight increase in provisioning primarily attributed to a one-time hit on the bank’s exposure to alternative investment funds (AIF). Provisioning in banking refers to the practice of setting aside funds to cover potential losses on loans or other financial assets. Market players have little clarity as of now on whether HDFC Bank has completed all the needed provisioning for the HDFC Ltd book it acquired or if any additional measures would become necessary over the next few quarters.
For the quarter ended December, ICICI Bank’s net interest margin (NIM) stood at 4.43%. Other key metrics, including fixed deposits and the loan portfolio, showcased positive trends with a 2.9% rise in fixed deposits and an 18.7% increase from a year ago. HDFC Bank had reported a decreasing NIM trend, something that makes markets uneasy.
So, which of the two is a better bank? Strictly speaking, this comparison will have to wait a while.
The banking business is essentially about managing loan growth, balancing it against deposit growth. Both ICICI Bank and HDFC Bank are robust, no doubt. However, worries about the short-term impact of the HDFC Ltd and HDFC Bank merger, particularly about the increased cost of funds for the bank will continue to play on the minds of investors. This increased cost is due to the bank assuming the liabilities of the erstwhile HDFC Ltd. This pain could persist for the next 24-30 months, requiring the bank to reduce its average funding cost by increasing deposit mobilization at lower costs.
Remember, one of the advantages that HDFC Bank has is its number of branches, compared to that of ICICI Bank. In the past three years, ICICI Bank’s branch network expanded by 12%, while HDFC Bank’s expanded over 47%. As HDFC Bank’s planned branch expansion continues ahead, it would help in increasing both the pace of and volume of the deposits it can mobilize.
Until it gets back its deposit mobilization to desired levels, an option that HDFC Bank has is to reduce the pace of its loan growth. This is something that banks have used as a balance sheet tool to stabilise their performance. The challenge is that HDFC Bank’s loan machinery has been built for current aggressive growth and hence slowing it down might not be possible.
This is the reason why the market probably anticipates that its ability to achieve its usual NIM levels of 4.3% and above, could take some more quarters to achieve. Despite facing short-term challenges associated with the merger, HDFC Bank is expected to rebound.
While HDFC Bank tides over these adjustments in the short term, ICICI Bank can be expected to continue its higher loan disbursements resulting in good overall performance. But not without its own challenge of capital raising, as its capital adequacy ratio (CAR) has declined to 14.61%. Capital adequacy ratio (CAR), is expressed as a percentage and compares a bank’s capital to its risk-weighted assets. A higher CAR indicates that a bank has a larger capital buffer relative to its risk exposure, which enhances its ability to withstand financial shocks. In comparison, HDFC Bank has robust CAR of 18.39%.
In the short term, while ICICI Bank seems poised to outshine HDFC Bank, a proper comparison of actual operational strength will be possible only after it increases its retail branches. That’s when the operational ratios of the two banks will become comparable. This retail expansion is expected to materialise post-October 2026 when ICICI Bank will get a new managing director and plausibly a new strategy.
