The March quarter (Q4FY22) earnings yielded several positive findings for ICICI Bank Ltd investors. Improved asset quality, lower provisions and a healthy loan growth helped fourth-quarter net profit exceed expectations. Moreover, the private sector lender’s domestic net interest margin (NIM) and return on assets hit an all-time high in Q4.
Close competitor HDFC Bank Ltd also saw lower provisions and stable asset quality in the fourth quarter. However, its core NIM at 4% hit a multi-quarter low, driven down by higher growth in the low-margin corporate debt segment. In case of ICICI Bank, NIMs rose 4 basis points to 4% sequentially and domestic NIMs were at an all-time high at 4.12%, analysts said. One basis point is 0.01%
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ICICI Bank’s continued focus on high-margin retail lending segments and easing excess balance sheet liquidity are some of the levers that could sustain its margins, analysts said. He cautioned that reducing the cost of funds could be a risk to its margin outlook.
However, its valuation gap with HDFC Bank seems to be 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 to bridge its valuation gap. An analyst at a domestic brokerage house, requesting anonymity, said it is likely to come down further as margin levers are out of play.
As per the analysis by Emkay Global Financial Services Ltd, ICICI Bank stock is trading at a multiple of 1.8x its FY24 earnings estimates based on adjusted book value. For HDFC Bank it is 2.2x (standalone) and 2x (merge). , Analysts said ICICI Bank has bridged the gap at a faster pace than expected due to its strong core performance.
The merger of HDFC Ltd has dampened sentiment towards HDFC Bank stock, which has fallen nearly 18% since the merger was announced on April 4. There are concerns over the speed of infection. Also, its technical problems were resolved recently.
“The recent price correction in HDFC Bank has put a valuation at par with that of 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 April 24. The scope for income upgradation will be higher in ICICI Bank as compared to HDFC Bank,” said the Kotak report.