Home / Markets / Mark To Market /  ICICI Bank is bridging the gap with HDFC Bank, in valuation

There were many positive takeaways for ICICI Bank Ltd investors from its March quarter (Q4FY22) earnings. Improving asset quality, lower provisions, and a healthy credit growth helped Q4 net profit surpass expectations. Further, the private sector lender’s domestic net interest margin (NIM) and return on assets touched an all-time high in Q4.

Close competitor HDFC Bank Ltd also saw lower provisions and stable asset quality in Q4. However, its core NIM at 4% hit a multi-quarter low, pulled down by higher growth in the low-margin corporate lending segment. In the case of ICICI Bank, NIM rose 4 basis points sequentially to 4% and domestic NIMs at 4.12% was at an all-time high, analysts noted. One basis point is 0.01%

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ICICI Bank’s continued focus on high-margin retail lending segments and unwinding of excess balance sheet liquidity are some levers that could keep its margin sustainable, analysts said. That said, bottoming out of cost of funds, may be a risk to its margin outlook, they cautioned.

Nonetheless, its valuation gap with HDFC Bank is seen narrowing. “ICICI’s NIMs have improved gradually over the quarters, but for HDFC Bank they have been range-bound for some time. This has helped ICICI Bank bridge its valuation gap. That is likely to come down further as margin levers play out," said an analyst with a domestic brokerage house requesting anonymity.

The ICICI Bank stock is trading at a multiple of 1.8x its FY24 earnings estimate on an adjusted book value basis, going by the analysis of Emkay Global Financial Services Ltd. For HDFC Bank this is at 2.2x (standalone) and 2x (merged). ICICI Bank has bridged this gap at a faster-than-expected pace because of its strong core performance, said the analysts.

The HDFC Ltd merger has dampened sentiment towards the HDFC Bank stock, which has fallen by about 18% since it announced the merger on 4 April. There are concerns on the pace of transition. Also, its technology woes were resolved only recently.

“The recent price correction in HDFC Bank has made valuations at par with ICICI Bank. ICICI Bank has a relatively simple and clean business ahead while HDFC Bank has to work through the merger," analysts at Kotak Institutional Equities said in a report on 24 April. “The extent of differentiation in return ratios or growth is not high, but the scope for earnings upgrades would be higher in ICICI Bank over HDFC Bank," said the Kotak report.

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