Key takeaway: Ahead of ICICIB’s 1Q results: We see better traction on retail loan growth & NII (vs HDFCB) giving comfort. Growth in business banking (incl ECLG) has been supportive and clarity on asset quality/growth would improve visibility on NIM expansion. HDFCB’s recent results suggest limited risk to slippage/credit cost ests for ICICIB. Its discount to HDFCB’s vals has narrowed to 35-40%, but val at 2.1x is attractive & disc. could narrow to 25-30%. ‘buy’.
Outperformance vs HDFCB on retail credit & NII growth. A key area in which HDFC Bank has lagged in recent quarters is retail loan growth, which has dragged NII growth as well. During 4Q, these grew by 7% & 13% YoY and in 1Q they were at 10% / 9%. ICICI Bank, on the other hand, has been able to grow better, reflecting better client mining and higher growth in the business banking segment. During 4Q, ICICI saw 20% growth in retail loans, aiding a 17% rise in NII. We expect ICICI Bank to post comparatively better growth in NII in 1Q as well (12-13%)m, which would underline its better revenue momentum.
Quality of business banking loans. ICICI Bank has been ramping up its business banking loans, which were up 37% YOY (including part of ECLG lending) compared to 11% growth in HDFCBs book in 4Q (21% in 1Q on lower base). These loans form 6% of loans for both banks. This segment clearly makes better margins, but can also be vulnerable to credit cycles. Hence, we believe that management commentary on the quality & growth of this segment will lend better visibility on traction in the top line & NIMs.
Limited risk to asset quality based on HDFCB’s results. We believe that HDFC Bank’s credit experience in its 1Q results indicates that ICICI Bank’s asset quality trends should be in line with our expectations. In FY21, ICICI Bank had a slippage ratio of 2.5% of past year loans compared to 1.8% for HDFC Bank. Whereas for 1Q our base case forecast is for a delinquency ratio of 3.6% for ICICI Bank vs 2.9% for HDFC Bank. A better than expected outcome could provide scope for lower credit costs of beefing up the buffer provisions (1.2% for ICICI and 0.7% for HDFC Bank).
Valuation gap has scope to narrow: The valuation gap discount of ICICI Bank vs DFC Bank has narrowed from 50%-60% to 35-40% now – a combination of rerating at ICICI Bank and some derating at HDFC Bank. We rate ICICI Bank at ‘buy’ with a target price of Rs 780 and an ADR target price of $20.
We see scope for a narrowing of the discount via 2 legs: (1) lower volatility, which reduces beta/CoE in stock; and (2) improvement in ROE.