The tale of 2 Lenders – Where is the underlying growth and is there cause for concern?

We have moved past 6 quarters of the first lockdown in the country and the financial sector growth is back across different phases. In the FY1Q 2021-22 Earnings, there was a strong growth of the loan book across the large private sector banks, alongside the release of Covid related provisions which boosted the bottom line (For eg: Comparing the provisions for ICICI Bank over the last 1 Year has seen the net provisions drop by 62% over the period).

Today, the two largest banks across the country are HDFC Bank and ICICI Bank, and the interesting trend in their growths offer a different approach taken by the two banks.

HDFC Bank

Over the last 1 year, there have been multiple issues faced by the bank. It started with the continuous issues the bank faced around technology and infrastructure-related challenges which then moved on to the bank being unable to issue credit cards (after being issued a ban by RBI). Mr. Shashi has been open around the issues and has spoken about addressing them in the latest 2021 annual report as well, alongside them creating a digital factory. While this would be more of a 3-year plan, and involve a significant overhaul, it’s a much-needed effort as they have been left wanting on many of the fintech integrations.

It’s important to realize that a bank’s NIM growth margins are significantly higher on the retail book as against the corporate loan book (where the competition is much higher, affecting margins). HDFC bank’s loan book was tilted towards retail at 62% exposure 5 years back, as against today where the exposure has dropped to 40%. In 2021, the retail loan growth of the bank stands at 5% against the corporate loan growth at 23%.

In the latest quarter, the bank was again cautious on Retail loan growth with the book growing at 9% as against the corporate loan book growing at 25.1%

Analysis of the data in a granular way over the last 1 year shows a similar trend, where the bank has had a healthy growth in the number of debit cards (4x the market in growth) vs a decline in the credit cards issued (0.25x the market in growth).

It’s important to understand the granular growth of the corporate loan book and if HDFC Bank is exercising caution on the retail loan book with data that is accessible to them.

(The graph below takes the charges registered for the loans given by the bank against each entity)

Source : Adqvest, MCA

The above tables across companies and sectors shows that HDFC Bank’s loan book growth in the corporate segment is coming predominantly through financial intermediation (NBFCs). While the bank has chosen to grow their retail book slower/in-line with the market, they have taken a concerted stance to grow their NBFC book (through their wholesale book at more than 2.5x the market rate).

ICICI Bank

ICICI Bank for a minority shareholder, has historically been a lot more cyclical than HDFC Bank. The growth of the bank on a headline perspective has been stronger in certain cycles vs HDFC Bank but some part of this growth has hurt them through increased credit costs. Today, contrary to HDFC Bank, ICICI has taken a concerted effort to grow their retail book over the last 2-3 years to the extent that the loan book of ICICI bank is skewed ~61% towards retail (the same number for HDFC Bank is at ~41% today). In FY21, ICICI grew the retail book by more than 20% and their corporate book by 10.1%.

Its no secret in the industry that ICICI Bank, today, is one of the best adopters of technology in the private sector banking industry. Talking to most fintech players gives us the feedback that their API’s are the easiest to integrate with and the bank has been significantly investing in technology over the last 3 years. To validate this, we looked at similar data for ICICI bank around where their growth is coming from :

The above 3 tables shows where the growth of ICICI Bank has come from over the course of the last year (In contrast with HDFC Bank, ICICI Bank has seen a 2x growth vs market on the cards business and has also increased its POS connectivity across the country – sign of a good technology integrator as they scale).

Moving towards the wholesale book of ICICI Bank, we wanted to spend some time to analyse the exposure of ICICI Bank vs HDFC Bank (where the latter’s growth came predominantly from NBFC and Financial loan exposure).

The two tables above show a very different exposure of ICICI Bank whose corporate loan book is skewed towards construction, infrastructure and old economy businesses.

For the first time over the last 10 years, Domestic institutions (Mutual Funds) in India are underweight HDFC Bank vs ICICI Bank and its understandable if one breaks down the granular data above. ICICI Bank has moved its loan book towards retail, showing a higher growth coming from the unsecured bucket. Today, with the underlying economy showing less stress in retail, we would expect shareholders continue to reward ICICI Bank over the coming quarters. However, there are two important trends we would be keen on monitoring over the next 4-6 quarters that would set the growth of the two banks.

1. Any stress building up in the retail lending book
2. Growth of the corporate loan book (for the first time corporate balance sheets are de-levered and cleaner in the last 10 years).

We continue to believe that returns in bank stocks will be determined by two factors:

1. Lending growth rate
2. Quality of growth

While ICICI Bank is clearly ahead in terms of the growth rate, its important one pays attention towards the quality of growth going forward.

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