Mumbai: HDFC Bank Ltd, already India’s biggest bank by market value, has overtaken ICICI Bank Ltd as the country’s largest private sector lender by domestic assets and is within striking distance of passing it in terms of the number of branches after years of consistently rapid expansion.
HDFC Bank’s loan book grew 22.7%, faster than the banking system’s average of 16%, in the fiscal year that ended 31 March. In contrast, ICICI Bank’s loan book grew at 14.4%. As a result, HDFC Bank’s domestic loan book now stands at Rs.2.29 trillion against ICICI Bank’s Rs.2.16 trillion.
ICICI Bank has 3,100 branches compared with HDFC Bank’s 3,062—a gap of just 38.
Part of the reason for the rapid strides made by HDFC Bank is ICICI Bank’s decision a few years ago to shrink its loan book as it came under the pressure of bad loans. More than HDFC Bank’s growth, ICICI Bank’s consolidation phase has changed the dynamics among private sector banks, said Dipankar Choudhury, an independent analyst who has tracked both banks since their inception.
Untill 2009, ICICI Bank was growing at four to five percentage points faster than HDFC Bank.
“In fiscal 2009 and 2010, ICICI Bank contracted its book and it is only in the last two years that the bank has started growing again. But there has been a strategic shift in ICICI Bank’s thinking because it now attaches more weight to profitability than top line growth at all costs,” Choudhury said.
ICICI Bank had shrunk its loan book by 3.24% to 2.18 trillion in 2008-09 as the bank piled up bad loans in its retail and overseas books in the aftermath of the global financial crisis that peaked with the collapse of Lehman Brothers Holdings Inc. in September 2008.
As loan losses widened further in 2009-10, its loan book declined by another 17% to Rs.1.81 trillion. ICICI’s gross bad loans as a percentage of total advances peaked at 5.14% in June 2010. It has since reduced their proportion to 3.22% in March 2013.
“HDFC Bank was always a retail-focused bank but it is today the largest private domestic lender because of its steady growth without any real chinks in its strategy,” Choudhury said.
To be sure, ICICI Bank’s overall loan book at Rs.2.9 trillion is still bigger than HDFC Bank’s Rs.2.39 trillion. For ICICI Bank, 25.3% or Rs.73,433 crore of loans are generated overseas, through its subsidiaries in the UK, Canada and Russia.
HDFC Bank’s overseas loans are worth Rs.10,000 crore, disbursed in Hong Kong and Bahrain.
HDFC Bank has two branches in Bahrain and Hong Kong through which it services non-residential Indian clients.
HDFC Bank has also stolen a march over ICICI Bank in terms of the number of automated teller machines (ATMs), and more importantly, substantially reduced the gap between the two banks in terms of branches.
In 2011-12, ICICI Bank had 9,006 ATMs, higher than HDFC Bank’s 8,913 ATMs. In 2012-13, HDFC Bank’s ATM network swelled to 10,743 while ICICI Bank’s network was 10,481.
In March 2011, ICICI Bank had 543 branches more than that of HDFC Bank with a 2,529 branch network against its closest rival’s 1,986.
HDFC Bank executive director Paresh Sukthankar said in a conference call after the bank’s annual results last week that the bank has added 1,300 branches in the last three years, expanding its network by 500 outlets in each of the last two years.
New markets, new customers
“We expect to grow at the same pace in the current years as well and as we go to new towns, we will penetrate new customers. This will become a huge driver in the bank’s growth and we are confident that with the range of products we have—be it in retail, agriculture or commodities—we expect to gain market share and develop cross-selling relationships. Currently, we have only about 3-4% of the market share and so there is every opportunity to increase it,” Sukthankar said.
Later in the week, in a conference call with journalists, ICICI Bank managing director and chief executive officer Chanda Kochhar said her bank will continue to invest in expanding the number of branches.
“At 3,100 branches, we still continue to be the largest private sector bank in India. We opened 348 branches in 2012-13, one-third of which were in small towns and rural areas; 800 of our branches are in priority sector areas where we are gaining agriculture deposits,” Kochhar said
The numbers speak for themselves as HDFC Bank chose to expand rapidly while ICICI Bank was shrinking its loan book, said Saurabh Tripathi, partner and director at The Boston Consulting Group (BCG).
“Deleveraging meant that ICICI Bank was not renewing existing loans and trying to build a new book. HDFC Bank, on the other hand, is a unique bank because it has grown at a certain level consistently while keeping its NPAs (non-performing assets) low, which drives its growth. Though HDFC Bank has taken the lead in some aspects currently, I think both the banks will be racing neck on neck in the time to come,” Tripathi said.
Choudhury, the independent analyst, said that besides increasing its geographical reach, the rapid expansion by HDFC Bank has allowed it to improve its obligations to the priority sector.
Under Reserve Bank of India (RBI) norms, 40% of a bank’s loans should be given to the so-called priority sectors consisting of agriculture, exporters and small companies. If a bank misses its target, they need to lend to the Rural Infrastructure Development Fund of the National Bank for Agriculture and Rural Development at a lower interest rate to bridge the shortfall.
Meeting priority sector targets is an important criterion for getting new branch licences from RBI.
ICICI Bank still in the race
Analysts are not ready to write off ICICI Bank. Jisha Nair, an analyst at Bank of Baroda Capital Markets Ltd, said though HDFC Bank remains the top favourite of investors because of its high fee income and low level of bad loans, ICICI is poised to make a comeback.
“HDFC Bank is commanding high valuations because it has delivered high return on assets consistently for many years. Its high fee income, low provisioning and no serious loan slippages make it a top pick. However, ICICI Bank is picking up, riding on higher NIMs (net interest margins). From here on, as they expand their loan book, their valuations will become more attractive,” Nair said.
ICICI Bank’s NIM, the difference between the rate charged for loans and that paid for deposits, improved to 3.3% in the fourth quarter from 3.01% in the same period last year. HDFC Bank’s NIM improved to 4.5% from 4.4% last year.
Although HDFC Bank has grown domestically at a faster rate, ICICI Bank’s global reach still makes it a bigger entity, said Suresh Ganapathy, head of the financial research team at Macquarie Capital Securities (India) Pvt. Ltd.
“ICICI Bank’s international book is nothing but lending to Indian companies; in that sense it is not really foreign. Yes, HDFC has grown at a faster pace in the last few years but overall for the system it has not changed much because private banks as a whole were and still will continue to take business away from public sector banks because of their more efficient workforce and better products,” Ganapathy said.
Choudhury said key parameters like market capitalization point to HDFC Bank being the largest bank in the country today.
“Both these banks’ growth rates could converge in the future but for the time being HDFC Bank is clearly the larger one,” Choudhury said.
HDFC Bank had Rs.1.65 trillion of market capitalization at the closing of stock market trading on Monday, ahead of State Bank of India’s Rs.1.52 trillion. ICICI Bank is number three with Rs.1.32 trillion of market capitalization.
On Monday, ICICI Bank gained 0.94% to close at Rs.1,163.15 on the BSE while the benchmark Sensex rose 0.60% to close at 19,504.18 points and the banking index Bankex fell 0.33% to 14363.74 points. HDFC Bank shares lost 1.71% to close at Rs.682.15.