Key takeaway: Ahead of ICICIB’s 1Q outcomes: We see higher traction on retail mortgage development & NII (vs HDFCB) giving consolation. Growth in business banking (incl ECLG) has been supportive and readability on asset high quality/development would enhance visibility on NIM growth. HDFCB’s latest outcomes recommend restricted danger to slippage/credit score value ests for ICICIB. Its low cost to HDFCB’s vals has narrowed to 35-40%, however val at 2.1x is engaging & disc. may slender to 25-30%. ‘buy’.
Outperformance vs HDFCB on retail credit score & NII development. A key space during which HDFC Bank has lagged in latest quarters is retail mortgage development, which has dragged NII development as properly. During 4Q, these grew by 7% & 13% YoY and in 1Q they had been at 10% / 9%. ICICI Bank, then again, has been capable of develop higher, reflecting higher consumer mining and better development within the business banking section. During 4Q, ICICI noticed 20% development in retail loans, aiding a 17% rise in NII. We count on ICICI Bank to put up comparatively higher development in NII in 1Q as properly (12-13%)m, which might underline its higher income momentum.
Quality of business banking loans. ICICI Bank has been ramping up its business banking loans, which had been up 37% YOY (together with half of ECLG lending) in comparison with 11% development in HDFCBs e book in 4Q (21% in 1Q on decrease base). These loans kind 6% of loans for each banks. This section clearly makes higher margins, however may also be susceptible to credit score cycles. Hence, we imagine that administration commentary on the standard & development of this section will lend higher visibility on traction within the prime line & NIMs.
Limited danger to asset high quality primarily based on HDFCB’s outcomes. We imagine that HDFC Bank’s credit score expertise in its 1Q outcomes signifies that ICICI Bank’s asset high quality traits ought to be in line with our expectations. In FY21, ICICI Bank had a slippage ratio of 2.5% of previous year loans in comparison with 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 greater than anticipated consequence may present scope for decrease credit score prices of beefing up the buffer provisions (1.2% for ICICI and 0.7% for HDFC Bank).
Valuation hole has scope to slender: The valuation hole low cost of ICICI Bank vs DFC Bank has narrowed from 50%-60% to 35-40% now – a mixture of rerating at ICICI Bank and a few derating at HDFC Bank. We rate ICICI Bank at ‘buy’ with a goal worth of Rs 780 and an ADR goal worth of $20.
We see scope for a narrowing of the low cost through 2 legs: (1) decrease volatility, which reduces beta/CoE in stock; and (2) enchancment in ROE.