HDFC vs ICICI: Who really won in Q3?

While the reappointment of ICICI Bank’s managing director and chief executive officer Sandeep Bakshi till October 2028 lifts a key overhang from the stock, the 4% year-on-year drop in profit-after-tax to ₹11,318 crore is disappointing.

In contrast, HDFC beat estimates with 12% growth in profit-after-tax to ₹18,654 crore. Excluding the one-time factors which tilted the scale significantly in favour of HDFC, the lead is narrower than it appears.

While both banks had to shell out additional provisions to meet the RBI’s mandate on loans misclassified under agricultural priority sector lending, ICICI’s provisions were far higher at ₹1,300 crore than HDFC’s ₹500 crore.

Importantly, excluding agricultural loans, both saw declining trends in bad assets. The managements assure that the additional provisions are regulatory and do not reflect deterioration in asset quality.

Sure, HDFC had to set aside a larger ₹800 crore towards one-time wage provisions under the new labour codes. But this was more than compensated for by its higher-than-expected trading gains worth ₹900 crore. Meanwhile, ICICI was dragged down further by ₹160 crore of treasury losses and wage provisions worth ₹150 crore.

Closing the core gap?

While HDFC furthered its lead on these one-off gains, it has narrowed the gap in its core business. Its net interest margin (NIM) rose eight basis points (bps) sequentially to 3.35%, while ICICI was largely flat at 4.3%.

Seasonal farm slippages weighed on ICICI’s fortunes, with interest-reversals shaving 21 bps off yields, and adding 8 bps to credit-costs. HDFC’s credit costs declined nine bps sequentially to 41 bps.

A 6% year-on-year growth in net interest income (NII) and 12% increase in fee income, helped HDFC report an 8% growth in core pre-provisioning operating profit (PPOP), surpassing analysts’ estimates, and also outpacing ICICI’s 6% growth. ICICI outperformed HDFC on NII growth at 8%, but its fee income grew only 6%.

Favourable liquidity conditions and bottomed out stress are expected to push up the industry’s credit growth to 12-13% in FY27. Margins are also expected to receive a leg up with sustained deposit repricing and lower borrowing costs.

HDFC’s management is confident of outperforming the industry by 1-3% on the back of continued recovery in wholesale credit. As for margins, ICICI’s NIM is expected to remain rangebound as deposit repricing and MCLR reductions cancel each other out. But there may be room for HDFC’s NIM to expand, given that out of the 125 bps policy rate cut, about two-third has been passed onto customers.

HDFC’s management has also assured of catching up on deposit growth. New branches, set up within the last five years, now account for a fifth of its incremental deposits. As these branches mature, they are expected to scale up deposit growth faster.

Earlier on 5 January, investors were spooked by HDFC’s Q3 business update, which showed its credit-deposit ratio (CDR) spike to 98.5%. The stock has plummeted around 5% since then. The management has chalked it up to “seasonality and credit opportunity," while reaffirming its commitment to bring CDR to the low-90s by FY27.

Nuvama Institutional Equities has a ‘buy’ rating on both stocks, but it has cut ICICI’s target price to ₹1,670 (from ₹1,750) or 2.8x FY27 estimated book value. Its target price for HDFC is unchanged at ₹1,170 or 2.7x FY27 estimated book value.