Key takeaway: Ahead of ICICIB’s 1Q final results: We see far better traction on retail loan development & NII (vs HDFCB) providing comfort. Growth in small business banking (incl ECLG) has been supportive and clarity on asset top quality/development would enhance visibility on NIM expansion. HDFCB’s current final results recommend restricted threat to slippage/credit expense ests for ICICIB. Its discount to HDFCB’s vals has narrowed to 35-40%, but val at 2.1x is appealing & disc. could narrow to 25-30%. ‘buy’.
Outperformance vs HDFCB on retail credit & NII development. A essential location in which HDFC Bank has lagged in current quarters is retail loan development, which has dragged NII development as effectively. During 4Q, these grew by 7% & 13% YoY and in 1Q they have been at 10% / 9%. ICICI Bank, on the other hand, has been in a position to develop far better, reflecting far better client mining and larger development in the small business banking segment. During 4Q, ICICI saw 20% development in retail loans, aiding a 17% rise in NII. We count on ICICI Bank to post comparatively far better development in NII in 1Q as effectively (12-13%)m, which would underline its far better income momentum.
Quality of small business banking loans. ICICI Bank has been ramping up its small business banking loans, which have been up 37% YOY (such as element of ECLG lending) compared to 11% development in HDFCBs book in 4Q (21% in 1Q on reduce base). These loans type 6% of loans for each banks. This segment clearly tends to make far better margins, but can also be vulnerable to credit cycles. Hence, we think that management commentary on the top quality & development of this segment will lend far better visibility on traction in the major line & NIMs.
Limited threat to asset top quality based on HDFCB’s final results. We think that HDFC Bank’s credit knowledge in its 1Q final results indicates that ICICI Bank’s asset top quality trends need to be in line with our expectations. In FY21, ICICI Bank had a slippage ratio of 2.5% of previous 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 far better than anticipated outcome could provide scope for reduce credit expenses of beefing up the buffer provisions (1.2% for ICICI and .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 mixture of rerating at ICICI Bank and some derating at HDFC Bank. We price ICICI Bank at ‘buy’ with a target cost of Rs 780 and an ADR target cost of $20.
We see scope for a narrowing of the discount by way of 2 legs: (1) reduce volatility, which reduces beta/CoE in stock and (2) improvement in ROE.