InCred Equities Prefers HDFC Bank Over ICICI Bank – Here’s the Reason

The Indian banking sector is currently in its healthiest state in a decade, with the September quarter expected to witness robust earnings growth driven by improved asset quality, loan expansion, and margin enhancement.

In a recent report, brokerage firm InCred Equities has expressed its preference for HDFC Bank over ICICI Bank, citing several key factors. InCred Equities believes that HDFC Bank is better positioned due to its extensive branch network expansion and rapid customer acquisition, compared to ICICI Bank. This strategic advantage ensures diversified and deeply penetrated growth with a loyal customer base.

The brokerage maintains “ADD” ratings for both large private sector banks. It has set a target price of ₹2,000 for HDFC Bank, representing a potential upside of nearly 30%, while for ICICI Bank, the target is ₹1,060, indicating an 11% upside.

“We believe both these banks are consistently improving their retail presence by offering diversified products customized to individual requirements. Both banks have well-established processes and formats that not only ensure smooth execution but also help maintain healthy asset quality. However, we prefer HDFC Bank over ICICI Bank due to its superior ground presence and faster customer acquisition,” InCred Equities explained.

Stock Price Trends

Over the past year, ICICI Bank has outperformed HDFC Bank, although both stocks have underperformed the Nifty Bank index. ICICI Bank’s shares gained 5.5% during this period, while HDFC Bank’s stock increased by approximately 4.4%. In contrast, the Nifty Bank index advanced over 9% in the last year.

In the year-to-date performance for 2023, ICICI Bank has risen by around 6%, while HDFC Bank experienced a decline of 6.4%. ICICI Bank delivered positive returns in 5 out of the 10 months in this calendar year, whereas HDFC Bank was positive in only 3.

Comparatively, the Nifty Bank has risen over 2% in 2023 year-to-date.

Currently trading at ₹942, ICICI Bank is approximately 6.5% away from its record high of ₹1,008.70, achieved in July 2023. It has also risen more than 18% from its 52-week low of ₹796.10, hit in January 2023.

HDFC Bank, currently trading at ₹1,523, is over 13% away from its peak of ₹1,757.80, reached in July 2023, but has increased by 6% from its 52-week low of ₹1,433.80, recorded in October 2022.

In the long term (3 years), ICICI Bank has been the stronger performer, with its stock delivering multibagger returns, surging by 126%, while HDFC Bank has seen a more modest increase of 26%.

HDFC Bank’s Q2 Performance

In its Q2 FY24 results, HDFC Bank reported a notable 50.6% increase in standalone net profit, reaching ₹15,976.11 crore compared to ₹10,605.78 crore in the corresponding period of the previous year. The bank’s net interest income (NII), which represents the difference between interest earned and interest expended, grew by 30.27% to ₹27,385.23 crore, up from ₹21,021.16 crore in the same period the previous year.

HDFC Bank’s gross non-performing assets were reported at 1.34% of gross advances as of September 30, down from 1.41% as of June 30, as per an exchange filing. The net non-performing assets were 0.35% of net advances as of September 30.

Reasons for Choosing HDFC Bank Over ICICI Bank

1. Branch Network Expansion: HDFC Bank has added 2,213 branches across India in the past two years, compared to ICICI Bank’s addition of 634 branches. This gives HDFC Bank a first-mover advantage in rural areas, which InCred Equities believes is vital for offering customized products and mitigating asset quality risks.
2. Granular Branch Presence: HDFC Bank has significantly enhanced its presence in Eastern and Central states of India, including UP, Bihar, MP, and northeastern states. These areas are experiencing a surge in organized penetration, making it beneficial for large lenders like HDFC Bank.
3. Customer Base: HDFC Bank boasts a larger customer base, with 68 million customers as of June 2023, while ICICI Bank’s number is not publicly available. To gauge the customer base, the brokerage used the number of debit cards outstanding, with HDFC Bank issuing 51.2 million cards compared to ICICI Bank’s 32.5 million.
4. Market Share Dominance: HDFC Bank maintains market share dominance in credit card issuances, holding a 20.3% market share in cards in force and a 26.5% share in spending, outperforming ICICI Bank in both categories.
5. Cross-Selling Opportunities: Following its recent merger with HDFC Limited, HDFC Bank is positioned for significant cross-sell opportunities to its existing mortgage customers, which could further bolster its retail growth, especially in unsecured lending.

In summary, InCred Equities favors HDFC Bank over ICICI Bank due to its extensive branch network, granular presence, larger customer base, market share dominance, and potential cross-selling opportunities. The brokerage anticipates normalized earnings with return on assets (RoAs) at 2% and return on equity (RoEs) at 16% in the coming years for HDFC Bank.