ECONOMY

ICICI Bank Vs HDFC Bank: Every Lender Has Its Year

In the early 2000s and until a little after the global financial crisis, it was ICICI Bank Ltd. that was grabbing the growth. Then came the downturn, an asset quality review and governance issues. The lender fell out of the favourites list and from first to second place in the pecking order of private banks by assets.

It was then HDFC Bank Ltd.’s turn to shine. Its caution, once seen as growth-impairing, was celebrated, it grew when others were cleaning-up, and became the undisputed leader. Then came a few governance issues, a management transition, technology troubles and now a retreat into its customary caution amid a new crisis.

Lo and behold, views have come full cycle and ICICI Bank is back in the spotlight. In the stock markets at least.

The Pandemic Year

The pandemic year saw the two largest private lenders take divergent paths. That is visible from the growth in the two loan books and, in particular, where the upside came from.

  • ICICI Bank saw its domestic loan book grow 18% in the pandemic year. HDFC Bank grew slightly slower at 14%. Both outperformed the system, which saw loan growth of 6%.
  • The real surprise is in the growth across segments. Retail loans for ICICI Bank grew 20% over the year, while retail powerhouse HDFC Bank grew that book just 6.7%.
  • For HDFC Bank, wholesale loans rose 21.7%, while ICICI reported that corporate loans grew 13.2% over the year. Note here that for HDFC Bank, wholesale loans include small business loans, while ICICI reports those separately. However, the share of those loans is small.

The result is that ICICI Bank, the original project financier and corporate-focused lender, now has 67% of its loan book in retail assets. In contrast, retail powerhouse HDFC Bank’s loan book is slightly more weighted towards wholesale loans, which make up 53% of the book.

As long-time banking sector watcher Suresh Ganapathy of Macquarie asked in a note on Apr. 26, “When was the last time that you saw ICICI Bank growing faster than HDFC Bank?” It was 15 years ago in the FY06-07 period,” he answered. “We all knew how that ended…,” wrote Ganapathy but added that this time ICICI appears to be growing better.

Within the broader categories, where is ICICI’s growth coming from?

Mortgages, which form 50% of the retail book, grew 22%, Macquarie Research said. In the corporate loans category, the share of A- and above rated corporates has gone up from 56% in FY17 to ~73% in FY21. “So, they have focused more on safer assets and grown the balance sheet,” Ganapathy said.

But there is always a reason to track rapid growth with some degree of caution, particularly in banking. Hemindra Hazari, another veteran banking analyst, wrote on his website that investors need to monitor the bank’s focus on mortgages.

“Within mortgages, the loan against property portfolio needs to be carefully monitored, as such loans can result in higher losses when there is a downturn. Although mortgages are secured, the asset value can plummet when lenders sell the security to realise the loan,” Hazari wrote, adding that “it is interesting to observe that, while HDFC Bank is de-emphasising retail loans, ICICI Bank still continues to aggressively grow retail.”

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