India’s two largest private lenders have bitten at each other’s ankles for decades now. If ICICI Bank Ltd. led India’s retail growth story in the late 1990s and the early 2000s, then HDFC Bank Ltd. was the pick of the pack in the post financial crisis period for more consistent performance.
It is now increasingly looking like it’s ICICI’s moment in the sun once again.
The fourth-quarter earnings have thrown up a convergence in key metrics between the two lenders. Where HDFC Bank has led for years now, ICICI Bank is catching up.
The convergence even prompted Macquarie analysts to say that ICICI Bank may be the ‘next HDFC Bank’, implying it may be the new ‘best in class’.
One key metric where ICICI Bank has caught up with its larger peer is net interest margins. This is the difference between the interest earned and interest paid by a bank. Simply put, it captures the effectiveness of a bank’s lending and eventually feeds into the net interest income or core income it earns.
A number of factors ranging from the mix of loans to the non-performing assets go into the final NIM earned by a lender.
Over the past three years, ICICI Bank has steadily seen its NIM improve from 3.19% to 4%. In contrast, HDFC Bank’s NIM has fallen from 4.40% to 4% now.
What’s changed?
One factor has been good traction in ICICI Bank’s chosen growth areas. ICICI Bank has chosen to grow its retail book more aggressively than HDFC Bank during the pandemic. Much of this growth has come from mortgages. Retail loans, excluding rural credit, make up 43.8% of ICICI Bank’s loan book. HDFC Bank’s retail loan book is at 39%.
In addition, ICICI has also reduced share of the lower margin international business to under 10% of its portfolio now.
This altered loan mix has aided margins.“Retail growth (ex-rural) was strong at 20% on a yearly basis, driven by secured mortgages and unsecured cards/personal loans. SME and business banking has also clocked strong growth, though on a low base," said Anand Dama, senior research analyst at Emkay Global Financial Services, in a report on Monday. “Thus, NIM improved 16 basis points yearly to 4% including domestic NIM at an all-time high of 4.1%." We see further room for margin improvement given ICICI Bank’s continued focus on the high-margin retail, SME and business banking portfolio, along with a higher share of floating rate book at […]
