HDFC Bank vs ICICI Bank: Which Bank Stock is Better?

Banks are known as the backbone of an economy because they have a direct bearing on financial and economic development. They also provide people a platform to park their surplus cash as well as borrow when they fall short.

According to the RBI, the cumulative credit of Indian banks stood at Rs 122.3 tn at the end of March 2022.

However, India is still an underpenetrated market in terms of banking services, primarily due to the low level of financial literacy in the country. As a result, the total credit outstanding is just 15% of the total value of all goods and services produced in the country.

Private sector banks and public sector banks (PSBs) together make up the Indian banking industry. For the last two decades, private banks have outperformed PSBs, largely due to better management.

In this article, we compare India's "too big to fail banking behemoths" HDFC Bank and ICICI Bank to see how they stack up against each other.

Banks run on a very simple business model. The basic premise of a bank comprises two major operations - accepting deposits and lending to borrowers.

Deposits

Deposits are the primary source of funds for a bank without which it cannot operate. This is because the bank uses the money it receives from deposits to lend to borrowers.

There are different types of deposits that contribute to the overall deposit base of a bank. These include deposits from current accounts and savings accounts (CASA), time deposits (certificate of deposits), fixed deposits, etc.

Given its importance, let's look at the deposit base of HDFC Bank and ICICI Bank and how it has grown over the last five years.

HDFC Bank vs ICICI Bank Deposits (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Deposit (in Rs m )
HDFC Bank	78,83,751	92,25,027	1,14,62,071	1,33,37,209	1,55,80,030
ICICI Bank	58,57,961	68,13,169	80,07,845	95,99,400	1,09,13,658
Deposit Growth (%)
HDFC Bank		17.0%	24.2%	16.4%	16.8%
ICICI Bank		16.3%	17.5%	19.9%	13.7%

Source: Equitymaster

Clearly, HDFC Bank has a higher deposit base than ICICI Bank. Also, the former has been growing its deposit base at a faster rate than the latter.

HDFC Bank's deposit base has grown at a CAGR of 14.6% over the last five years. ICICI Bank's average deposit growth was 13.3% during the same period.

Advances

Now, let's take a look at the other side of the equation, which is loans. Banks use their deposits to disburse loans or advances as they call it in banking parlance. The growth of advances should keep up with the growth of a bank's deposits.

The following table compares the advances of HDFC Bank and ICICI Bank.

HDFC Bank vs ICICI Bank Advances (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Advances (in Rs m )
HDFC Bank	70,00,338	86,92,227	1,04,36,709	1,18,52,835	1,42,09,423
ICICI Bank	56,68,542	64,69,617	70,62,461	79,18,014	92,03,081
Advances Growth (%)
HDFC Bank		24.2%	20.1%	13.6%	19.9%
ICICI Bank		14.1%	9.2%	12.1%	16.2%

Source: Equitymaster

Even here, HDFC Bank's advances have grown faster than that of ICICI Bank. For the last 5 years, HDFC Bank's advances have grown at a CAGR of 15.2% compared to ICICI Bank's 10.2% CAGR during the same period.

For the financial year 2022, HDFC Bank's advances were 91.2% of its total deposits. ICICI Bank's total advances stood at 84.3% of total deposits.

Clearly, HDFC Bank is more efficient than ICICI Bank in terms of utilising its deposit base.

HDFC Bank vs ICICI Bank Advances to Deposits (2017-2022)

Advances to deposits (%)	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
HDFC Bank	88.8%	94.2%	91.1%	88.9%	91.2%
ICICI Bank	96.8%	95.0%	88.2%	82.5%	84.3%

Source: Equitymaster

Net Interest Income (NII)

Now, coming to how a bank makes profits, you need to know its major sources of revenue and the costs it incurs.

Let's talk about costs first.

The banking industry is extremely competitive. A bank wants you to park your money with it and not with its peers. In a bid to acquire more deposits, a bank offers you incentives on your deposits.

This incentive is called interest which is calculated as a percentage of your deposits. Interest paid to depositors is a major cost incurred by a bank. It constitutes a large chunk of its total expenses.

On the other hand, a bank charges interest on loans offered. Interest earned through loans is a major source of revenue for a bank and constitutes a large chunk of its total revenue.

The interest charged to borrowers is always higher than the interest offered to depositors. The difference between the interest earned and interest paid is the bank's gross income. This differential is also known as net interest income (NII).

The following table shows how HDFC Bank and ICICI Bank stack up against each other on these metrics.

HDFC Bank vs ICICI Bank interest income (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Interest income (Rs m)
HDFC Bank	8,52,878	10,51,607	12,21,893	12,85,524	13,59,364
ICICI Bank	6,21,623	7,19,817	8,48,358	8,91,627	9,54,069
Interest expense (Rs m)
HDFC Bank	4,23,815	5,37,127	6,21,374	5,92,476	5,85,843
ICICI Bank	3,42,620	3,91,775	4,46,655	4,26,591	4,11,667
Net interest income (Rs m)		19.9%	16.7%	15.4%	11.6%
HDFC Bank	4,29,063	5,14,480	6,00,519	6,93,048	7,73,521
ICICI Bank	2,79,003	3,28,041	4,01,703	4,65,036	5,42,402

Source: Equitymaster

HDFC Bank's NII has grown at a CAGR of 12.5% over the last five years. ICICI Bank's NII has grown at a CAGR of 14.2% during the same period.

Though HDFC Bank has higher net interest income, ICICI Bank is leading in terms of NII growth.

Net Interest Margin

Net interest margin (NIM) is basically net interest income divided by the total amount of loan disbursed by a bank. It is one of the measures of a bank's profitability. Therefore, the higher the NIM the better it is for banks.

The following table shows the net interest margin of HDFC Bank and ICICI Bank.

HDFC Bank vs ICICI Bank Net Interest Margins (2017-2022)

Net interest margins (%)	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
HDFC Bank	4.60%	4.40%	4.20%	4.30%	4.10%
ICICI Bank	3%	3.1%	3.5%	3.5%	5.90%

Source: Equitymaster

Despite having a higher interest income, HDFC Bank's net margin is lower in than ICICI Bank in the last fiscal year. However, HDFC Bank's net interest income has been quite stable over the years and averages at 4.3%. This is compared to ICICI Bank's average of 3.8%.

Which bank scores well on this important metric?

The biggest fear of any bank is its borrowers defaulting on their payment obligations. A borrower may do so wilfully, or he/she may be unable to fulfil payment obligations due to unforeseen circumstances.

An example of wilful delinquency would be that of the flamboyant Vijay Mallya. He took a massive loan of Rs 7 bn from a consortium of banks led by State Bank of India (SBI) to fund the operations of now-defunct airline Kingfisher.

An example of the latter would be of Covid-19 pandemic which severely affected the business landscape. Many people lost their jobs which dented their financial position. This in turn led to their inability to pay their loans.

In any case, if the payment is overdue for a period of more than 90 days, then the loan becomes a non -performing asset (NPA). This is because the bank isn't earning any interest from the loan.

NPAs beyond a certain limit could damage the fortunes of a bank leading to its bankruptcy. To avoid such a situation, it is crucial for a bank to check the creditworthiness of an individual or entity to whom the loan is being offered.

The performance of HDFC Bank and ICICI Bank have been exemplary in this space.

The following table shows NPAs reported by HDFC Bank and ICICI Bank. It is expressed as a percentage of a bank's total advances.

HDFC Bank vs ICICI Bank Net NPA (2017-2022)

Net NPA (%)	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
HDFC Bank	0.4%	0.4%	0.4%	0.4%	0.3%
ICICI Bank	5.4%	2.3%	1.5%	1.2%	0.8%

Source: Equitymaster

As can be seen from the table, HDFC Bank has consistently reported lower NPAs. The five-year average of HDFC Bank's NPAs is approximately 0.4% which is the lowest in the industry. It means that if HDFC Bank disburses a total loan of Rs 100, then Rs 0.4 doesn't come back to the bank.

It should come as no surprise that HDFC Bank holds the distinction of reporting more than 20% YoY profit growth every quarter for over 40 quarters. All this while, its net NPAs have never crossed 0.5% of loans!

The five-year average of ICICI Bank's NPAs is 2.2% which is nowhere near HDFC Bank. Although the average seems high, it is important to note that ICICI Bank's NPAs have come down drastically. This has been happening since the top-level management was changed in 2017 and Mr Sandeep Bakshi was instated as the CEO of the bank.

Net Profit

Closely associated with NPAs are provisions. Whenever a bank reports an NPA, it has to keep aside a portion of its interest income to provide for the loss incurred due to the NPA.

Provisions are a major expenditure for banks and impact their net profits significantly. This can be seen in the case of HDFC Bank and ICICI Bank.

The following table compares the net profit and its growth of HDFC Bank and ICICI Bank.

HDFC Bank vs ICICI Bank Net Profit (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Net Profit (in Rs m )
HDFC Bank	1,85,100	2,23,324	2,72,540	3,18,332	3,80,528
ICICI Bank	77,122	42,542	95,663	1,83,843	2,57,838
Net Profit Growth (%)
HDFC Bank		20.7%	22.0%	16.8%	19.5%
ICICI Bank		-44.8%	124.9%	92.2%	40.2%

Source: Equitymaster

HDFC Bank's net profit has grown at a CAGR of 15.5% over the last five years. This is compared to ICICI Bank's net profit growth of 27.3%.

Despite higher provisions, ICICI Bank's net profit growth is higher than HDFC Bank, indicating operational efficiency.

HDFC Bank has reported relatively higher and stable margins as compared to ICICI Bank. However, ICICI Bank isn't far behind.

The following table shows the net profit margins of HDFC Bank and ICICI Bank.

HDFC Bank vs ICICI Bank Net Profit Margin (2017-2022)

Net profit margins (%)	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
HDFC Bank	21.7%	21.2%	22.3%	24.8%	28%
ICICI Bank	12.4%	5.9%	11.3%	20.6%	27%

Source: Equitymaster

The five-year average net profit margin of HDFC Bank is 23.6%, while for ICICI Bank it is 15.4%.

Dividend Payout

Investors tend to invest in companies that pay dividends to their shareholders.

Dividends are a company's accrued profits distributed equally among shareholders. A company may pay a dividend when it doesn't have any immediate expenses to pay for.

The following table shows the dividend paid by HDFC Bank and ICICI Bank to their shareholders over the last five years.

HDFC Bank vs ICICI Bank Dividend (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Divided per share
HDFC Bank	6.5	7.5	2.5	6.5	15.5
ICICI Bank	1.5	1	0	2	5
Dividend Payout Ratio(%)
HDFC Bank	9.1%	9.1%	5.0%	11.3%	22.6%
ICICI Bank	12.5%	15.2%	0%	7.5%	13.50%

Source: Equitymaster

HDFC Bank has paid an average of Rs 7.7 as dividend to each shareholder over the last five years. This is compared to ICICI Bank's average of Rs 1.9 during the same period.

Another dividend metric that investors look at before investing in any company is the dividend payout ratio. The dividend payout ratio determines how much dividend a company is paying from its earnings.

The five-year average dividend payout ratio of HDFC Bank and ICICI Bank is 11.4% and 9.7%, respectively.

Banking outlets

Physical branches are still a preferred mode of accessing basic banking services, especially in rural areas. Therefore, physical branches hold importance for a bank's growth.

To ensure last-mile delivery of basic banking services, Indian banks serve its customers through third party partners, who are also known as business correspondents (BCs) especially in areas where it is not feasible for banks to operate a full-fledged physical branch.

As of 30 June 2022, HDFC Bank, had a total of 6,378 banking outlets across 3,203 cities.

On the other hand, ICICI Bank had a total of 5,275 banking outlets spread across India as of June 2022.

Investments and acquisitions

Apart from physical banking outlets, Indian banks have been focusing on developing digital channels. This is to deliver a seamless banking experience to customers and reduce their costs.

Banks have been investing and collaborating with fintech companies to leverage their technological expertise and expand their reach.

HDFC Bank entered into a strategic partnership with Paytm to leverage Paytm's digital platform and expand its reach in rural markets where Paytm enjoys good rapport with small merchants. This partnership will help the bank to grow its retail loan book.

HDFC Bank has also invested in Bengaluru based wealth management tech platform Smallcase.

Meanwhile, ICICI Bank has partnered with fintech platform Niyo to offer prepaid cards to MSME workers with the objective to rope them under the banking ecosystem.

The bank has launched "iMobile Pay" to capture a market share in the UPI payment market which is dominated by fintech companies like Phonepe and Google Pay.

In April 2022, HDFC Bank and HDFC announced a merger enabling HDFC Bank to tap into home loan business.

This will also give an edge to HDFC Bank over its peers such as ICICI Bank and Axis Bank in terms of loans.

In July 2022, RBI has approved the merger and as per merger agreement HDFC Bank will sell home loans, and HDFC will approve and disburse them.

Return ratios

Return on equity (RoE) and return on assets (ROA) are two important ratios that analysts check while comparing banks.

Return on equity (ROE) tells an investor how much profit a company generates on shareholders capital. It is expressed in terms of percentage.

Return on assets (ROA) tells an investor how much profit a company generates on total assets the company owns.

Important point to note is loans are assets for banks and ROA is calculated as a ratio of net income to its total performing (generating interest income) assets. For banks, ROA of 1% is a benchmark and anything beyond that is considered excellent.

HDFC Bank vs ICICI Bank Return Ratios (2017-2022)

ROE (%)	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
HDFC Bank	16.9%	14.5%	15.5%	15.2%	15.4%
ICICI Bank	7%	3.7%	7.8%	11.7%	14.44%
ROA (%)
HDFC Bank	1.7%	1.7%	1.7%	1.8%	1.8%
ICICI Bank	0.7%	0.3%	0.7%	1.2%	1.50%

Source: Equitymaster

The five-year average RoE for HDFC Bank stands at 15.5%, while for ICICI Bank it is 8.9%.

In terms of ROA, HDFC Bank is again leading with a five-year average of 1.7% against 0.9% of ICICI Bank.

Valuation ratios

While comparing banks, analysts usually use two ratios to find out which is undervalued. These two ratios are price to book value (P/BV) and price to earnings ratio (P/E).

Price to book value (P/BV) indicates the price an investor is willing to pay for each rupee of a company's book value.

On the other hand, price to earnings indicates how much an investor is willing to pay for each rupee of a company's earnings.

A low P/BV and P/E ratio indicates the company's shares are undervalued.

HDFC Bank vs ICICI Bank Valuation Ratios (2021-2022)

	P/BV	5 year average P/BV	P/E	5 year average P/E
HDFC Bank	3.4	3.5	22	22.7
ICICI Bank	3.1	2.2	21.8	28.7

Source: Equitymaster

HDFC Bank trades at a higher P/BV than ICICI Bank primarily because the market is giving higher value to HDFC Bank's consistent performance.

In terms of P/E both the banks are trading in the similar range with a slight gap in valuation.

Clearly, HDFC Bank is a little overvalued here, but for the right reasons.

Future prospects

A large part of India is still credit averse. A lot of people in India see loans and credit in a bad light. As a result, India lags behind developed nations in terms of credit.

India's total outstanding loans to gross domestic product (GDP) is just 15% compared to 80-100% of its western counterparts.

So India has got a lot to cover, and there is a lot of headroom for growth for Indian banks. Let's look at some of the possibilities of how India may achieve higher credit growth and financial inclusion.

To start with, as companies adopt China plus one strategy, they see India as an obvious alternative. The Indian government too is looking at this opportunity to make India a big manufacturing hub in the world.

Small and medium enterprises (SME) would play a crucial role in making India a manufacturing hub. Hence, SME financing could be a great opportunity for banks to grow their loan book.

Also, it is expected that people currently working in the agriculture sector would shift to the manufacturing sector once the sector starts growing. Therefore, rural markets would present a new wave of growth for banks to ride on.

However, digital and financial literacy remains a big challenge. Banks have to tackle this issue if they wish to leverage the untapped potential of the rural market.

Last but not least, due diligence remains a key to any bank's success. Any bank which follows a quality due diligence framework and keeps a check on its bad loans will emerge as a leader. HDFC Bank is a perfect example of this.

To sum up, HDFC Bank and ICICI Bank being fundamentally strong stocks and top players in the industry, are poised to grow as the overall industry grows.

Which is better?

If we compare the two banks on credit growth, then both banks are growing their loan book almost at an equal rate across the interest cycle.

However, if we compare them on the credit quality, HDFC Bank is far ahead of ICICI Bank. HDFC Bank has reported consistently lower and stable NPAs across the interest cycle whereas ICICI Bank's credit quality has fluctuated a lot and is relatively unstable.

On the net interest margin front, too, HDFC Bank scores better but ICICI Bank isn't far behind.

Ever since the management of ICICI Bank was overhauled with Sanjay Bakshi taking charge, there has been a drastic improvement in the bank's performance. It's inching closer to HDFC Bank in terms of financial performance and is one of the fastest growing companies in India 2022. This is something that needs to be noted.

Though this article might have made things easier for you, we strongly recommend you check the fundamentals and valuations of both these companies on your own.

Still confused which is better?

Use Equitymaster's compare company tool for a detailed comparison between HDFC Bank and ICICI Bank. You can also use this tool to draw a detailed comparison of any two companies of your choice.

HDFC Bank vs ICICI Bank

You can also compare both companies with their peers.

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For a more detailed analysis, check out the financial fact sheet of HDFC Bank and ICICI Bank.

You can also check out the latest quarterly results of HDFC Bank and ICICI Bank.

Since stocks from the banking sector interest you, check out Equitymaster's powerful stock screener to find the top banking companies in India.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...