India's two largest private banks reported very different second-quarter results on 17 October. ICICI Bank posted a 22.3 percent rise in consolidated profit after tax to Rs 16,333 crore, up from Rs 13,357 crore a year earlier, with net interest income up 15.9 percent to Rs 30,336 crore and return on equity at 16.9 percent. HDFC Bank reported a 4.7 percent rise in standalone net profit to Rs 19,510 crore, with net interest income up 9.7 percent to Rs 34,620 crore. HDFC Bank is still the bigger earner in absolute terms, but ICICI Bank is growing several times faster, which has turned the quarter into a comparison of how the two lenders are managing their balance sheets in a period of rising rates.
The argument that ICICI Bank is simply executing better is clear from its numbers. Operating profit rose 20.2 percent to Rs 24,010 crore, and total income grew 15.5 percent to Rs 62,505 crore, while operating expenses grew a slower 12.7 percent. Provisions were Rs 895 crore against Rs 910 crore a year earlier, so the profit growth did not rely on lower credit costs alone. Return on equity improved from 16.1 percent a year ago to 16.9 percent, and earnings per share rose to Rs 91 from Rs 74.80. HDFC Bank, by contrast, grew gross advances 16.3 percent and deposits 18.8 percent, yet net interest income rose only 9.7 percent, and its net interest margin on total assets was reported at 3.16 percent, down from 3.26 percent in the previous quarter.
The argument that the gap is exaggerated starts with the way the figures are drawn. The ICICI number is consolidated, while the HDFC headline is standalone; on a consolidated basis, Kotak Neo reported HDFC Bank's profit at Rs 20,700 crore, up 5.6 percent, which is slightly better but still well behind. HDFC Bank's balance sheet is also moving through a different phase, with the bank gathering deposits faster than it lends, and its gross NPA ratio improved to 1.11 percent from 1.24 percent a year earlier, the kind of cleanliness that investors pay for. ICICI Bank's capital adequacy ratio fell to 16.62 percent from 16.75 percent, which means its fast growth is using up capital, and its share price had already closed at Rs 1,397 before the results were out.
The contrast matters because the two banks are heavyweights in the Sensex and Nifty, and because they act as a guide to credit demand in the economy. A bank that grows profit above 20 percent while keeping provisions flat suggests that borrowers are repaying and that lending is healthy. A bank whose profit lags its loan growth by a wide margin points to the cost of funding deposits in a tightening cycle, a pressure that the Reserve Bank's 25-basis-point hike to 5.50 percent will not ease.
ICICI Bank had the stronger quarter on every growth measure, while HDFC Bank had the cleaner loan book. The next two quarters will show whether HDFC can turn deposit growth into earnings.
Featured image: An ICICI Bank branch in Hyderabad (file photo). Photo: Wasiul Bahar, CC BY-SA 4.0, via Wikimedia Commons.
Leave a Reply