The cumulative credit of Indian banks stood at Rs 110.46 lakh crore at the end of September 2021.

Banks are referred to as the foundation of an economy due to the fact that they keep enough liquidity by distributing money in the economy.

Banks offer people a platform to park their surplus cash as well as obtain when they fail.

According to the RBI, the cumulative credit of Indian banks stood at Rs 110.46 lakh crore at the end of September 2021.

Nevertheless, India is still an underpenetrated market in regards to banking services mostly due to low level of financial literacy in the nation.

As a result, the total credit impressive is simply 15% of the total worth of all items and services produced in the country.Private sector banks and public sector banks (PSBs) together offset the Indian banking market.

For the last twenty years, private banks have actually exceeded PSBs, mainly due to much better management.

In this post, we compare India's too huge to fail banking behemoths HDFC Bank and ICICI Bank to see how they stack up against each other.Banks operate on an extremely easy organization design.

To understand business design, you need to first comprehend the functional dynamics of a bank.

The standard operational property of a bank comprises 2 significant operations - accepting deposits and providing to borrowers.

Deposits are the primary source of funds for a bank without which it can not run.

This is due to the fact that the bank utilizes the money it receives from deposits to provide to debtors.

There are various types of deposits that add to the general deposit base of a bank.

These include deposits from current accounts and savings accounts (CASA), time deposits (certificate of deposits), repaired deposits, and so on.

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

Plainly, HDFC Bank has a greater deposit base than ICICI Bank.

Likewise, the former has been growing its deposit base at a faster rate than the latter.

HDFC Bank's deposit base has actually grown at double digit CAGR of 15.7% over the last five years.

This is compared to ICICI Bank's typical growth of 13.4% during the exact same period.

Advances Now, let's have a look at the opposite of the formula which is interested in 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 development of a bank's deposits.

Following table compares advances of HDFC Bank and ICICI Bank.

Even here, HDFC Bank's advances have actually grown faster than ICICI Bank's.

For the last 5 years, HDFC Bank's advances have grown at a CAGR of 15.1% compared to ICICI Bank's 9% CAGR throughout the same duration.

For the year ended March 2021, HDFC Bank's advances were 88.9% of its total deposits whereas this figure was 82.5% for ICICI Bank.

Clearly, HDFC Bank is more effective than ICICI Bank in regards to utilising its deposit base.

Net Interest Income (NII)Now, coming to how a bank makes revenues, you need to understand its major sources of profits and costs it sustains.

Let's discuss expenses first.

The banking industry is exceptionally competitive.

A bank wants you to park your money with it and not with its peers.

In a quote to obtain more deposits, a bank provides you incentives on your deposits.

This incentive is called interest which is calculated as a portion of your deposits.

Interest paid to depositors is a significant cost incurred by a bank and makes up a large piece of its total expenditures.

On the other hand, a bank charges an interest on loans provided.

Interest made through loans is a significant source of income for a bank and constitutes a large portion of its total income.

The interest credited debtors is always greater than the interest offered to depositors.

The distinction between the interest earned and interest paid is the bank's gross income.

This differential is also called net interest income (NII).

The following table shows how HDFC Bank and ICICI Bank compare to each other on these metrics.HDFC Bank's NII has grown at a CAGR of 14.5% over the last years whereas ICICI Bank's NII has actually grown at a CAGR of 12.2% during the same period.

Net Interest MarginNet interest margin (NIM) is generally net interest income divided by the total amount of loan disbursed by a bank.

It is among the steps of a bank's profitability.

Higher the NIM the much better it is for banks.

The following table reveals net interest margin of HDFC Bank and ICICI Bank.HDFC Bank's higher interest earnings has translated into greater NIM for the bank.

HDFC Bank's net interest income has actually been quite stable over years and averages at 4.6%.

This is compared to ICICI Bank's average of 3.2%.

Which bank ratings well on this essential metric?The biggest fear of any bank is its customers defaulting on their payment commitments.

A customer may do so willfully or he/she might be not able to fulfill payment commitments due to unpredicted situations.

An example of willful delinquency would be that of the flamboyant Vijay Mallya who took a massive loan of Rs 700 crore from a consortium of banks led by State Bank of India (SBI) to money the operations of now defunct airline company Kingfisher.

An example of the latter would be of Covid-19 pandemic which significantly impacted business landscape.

Lots of people lost their jobs which dented their monetary position which in turn led to their failure 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 properties (NPA).

because the bank isn't making any interest from the respective loan.

NPAs beyond a specific limitation could drain pipes the fortune of a bank causing its insolvency.

To prevent such a scenario, it is crucial for a bank to inspect the credit reliability of an individual or entity to whom the loan is being provided.

The efficiency of HDFC Bank and ICICI Bank have been exemplary in this area.

The following table reveals NPAs reported by HDFC Bank and ICICI Bank.

It is revealed as a portion of a bank's overall advances.

As can be seen from the table, HDFC Bank has regularly reported lower NPAs.

The 5 year average of HDFC Bank's NPAs is approximately 0.4% which is the lowest in the industry.

It suggests that if HDFC Bank pays out an overall loan of Rs 100 then Rs 0.4 doesn't return to the bank.

It needs to come as no surprise that HDFC Bank holds the difference of reporting more than 20% YoY earnings development every quarter for over 40 quarters.

All this while, its net NPAs have actually never crossed 0.5% of loans!The 5 year average of ICICI Bank's NPAs is 3.16% which is no place near HDFC Bank.

Although the typical appears high, it is essential to keep in mind that ICICI Bank's NPAs have boiled down significantly ever since the top level management was altered in 2017 and Mr Sandeep Bakshi was instated as the CEO of the bank.

Net ProfitClosely associated with NPAs are arrangements.

Whenever a bank reports an NPA it has to keep aside a part of its interest income to provide for the loss incurred due to the respective NPA.

Arrangements are a major expense 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 revenues of HDFC Bank and ICICI Bank.

HDFC Bank's net earnings have grown at a CAGR of 15.9% over the last 5 years.

This is compared to ICICI Bank's net revenue development of 12.5%.

ICICI Bank's net profit development is sluggish as compared to HDFC Bank primarily due to high arrangements being reported by the bank.Also, HDFC Bank has reported relatively higher and steady margins as compared to ICICI Bank.

The following table shows the net earnings margins of HDFC Bank and ICICI Bank.Dividend PayoutInvestors tend to invest in business that pay dividends to their shareholders.Dividend is business's accrued earnings distributed equally amongst investors.

A company may pay a dividend when it does not have any immediate expenditures 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 has actually paid an average of Rs 5.7 to each investor over the last 5 years.

This is compared to ICICI Bank's average of Rs 1.4 throughout the very same period.Another dividend metric that financiers look at before purchasing any business is dividend payment ratio.

Dividend payout ratio determines how much dividend a business is paying from its earnings.

The five-year typical dividend payout ratio of HDFC Bank and ICICI Bank is 12.4% and 9.9%, respectively.Banking outletsPhysical branches are still a favored mode of accessing standard banking services particularly in rural areas.

Physical branches hold importance for a bank's growth.

To ensure last mile delivery of basic banking services, Indian banks serve its consumers through 3rd party partners who are also known as service correspondents (BCs) specifically in areas where it is not possible for banks to operate a full-fledged physical branch.

Since March 2021, HDFC Bank had a total of 21,364 banking outlets across the world.

ICICI Bank had a total of 9,266 banking outlets spread throughout India since March 2021.

Of the total, 5,266 are physical branches and 51% of the overall physical branches are present in backwoods.

The remaining banking outlets are BCs.

Investments and acquisitionsApart from physical banking outlets, Indian banks have actually been concentrating on establishing digital channels to provide seamless banking experience to customers and minimize their expenses.

Banks have actually been investing and working together with fintech companies to utilize their technological expertise and expand their reach.

HDFC Bank entered into a strategic collaboration with Paytm to leverage Paytm's digital platform and broaden its reach in rural markets where Paytm delights in good rapport with small merchants.

This partnership will assist the bank to grow its retail loan book.

HDFC Bank has likewise bought Bengaluru based wealth management tech platform Smallcase.

Meanwhile, ICICI Bank has actually partnered with fintech platform Niyo to offer prepaid cards to MSME employees with the goal to rope them under the banking community.

The bank has actually released iMobile Pay to record a considerable market share in the UPI payment market which is controlled by fintech companies like Phonepe and Google Pay.

Return and Evaluation ratiosWhile comparing banks, analysts generally use three ratios to discover which is underestimated.

These three ratios are return on equity (ROE), return on possessions (ROA), and price to book value (P/BV).

Return on equity (ROE) tells a financier how much revenue a business generates on investors capital.

It is revealed in regards to portion.

Return on possessions (ROA) informs a financier how much revenue a company generates on total possessions the business owns.

Important point to note is loans are assets for banks and ROA is determined as a ratio of earnings to its total performing (generating interest income) possessions.

For banks, ROA of 1% is a benchmark and anything beyond that is considered outstanding.

Price to book worth (P/BV) indicates the price an investor wants to spend for each rupee of a company's book value.HDFC Bank outperforms ICICI Bank in terms of ROE and ROA.

HDFC Bank trades at a greater P/BV than ICICI Bank mostly since the market is providing greater value to HDFC Bank's constant performance.

Clearly, HDFC Bank is a little overvalued here but for the best factors.

Effect of Covid-19When the lockdown was announced to suppress the spread of the virus, banking stocks plunged the most.

Stock costs fell in the anticipation that NPAs would soar considerably.

However, the Reserve Bank of India (RBI), was quick to announce a slew of procedures which assisted the debtors and the banks to deal with the force of the pandemic.

To begin with, the RBI revealed a six month moratorium on loan payments.

This measure helped banks report lower than expected NPAs and as a result stem their losses.

The RBI performed long term repo operations so that the banks can borrow from the RBI at a minimum rate of 4% and provide it forward to those in requirement.

This step ensured that adequate liquidity was kept in the economy and the economic engine isn't prevented due to non-availability of required capital.

For the first two quarters of the financial year 2021, although the banks reported lower NPA figures, they likewise reported flat or negative income and earnings development.

However, need revived in the 3rd and the 4th quarter as restrictions were reduced and festival season dawned upon the country.

Mortgage were the significant need motorist in the retail category due to lower rates of interest regime and softening property rates.

In the wholesale category, banks funded the increased working capital requirements due to high input cost and freight cost.

Thanks to this revived demand, Indian banks closed the year on a healthy note.Future prospectsA big part of India is still credit averse.

A great deal of individuals in India see loans and credit in a bad light.

As an outcome, India lags behind established countries in regards to credit.

India's overall outstanding loans to gdp (GDP) is just 15% compared to 80-100% in its western equivalents.

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 might attain greater credit development and monetary inclusion.

To start with, as companies adopt China plus one technique, they see India as an apparent alternative.

The Indian government too is looking at this opportunity to make India as the biggest manufacturing hub worldwide.

Little and medium enterprises (SME) would play a vital function in making India a production center.

SME funding might be a terrific opportunity for banks to grow their loan book.Also, it is anticipated that people presently working in the farming sector would shift to the production sector once the sector starts growing.

Rural markets would present a brand-new wave of growth for banks to ride on.

Nevertheless, digital, and monetary literacy stays a big obstacle.

Banks need to tackle this concern if they want to utilize the untapped capacity of the rural market.

Finally, due diligence remains a secret for any bank's success.

Any bank which follows a quality due diligence framework and keeps an examine its bad loans will become a leader.

HDFC Bank is an ideal example of this.

To sum up, HDFC Bank and ICICI Bank being the top gamers in the industry are poised to grow as the general market grows.

Equitymaster's viewWe connected to Tanushree Banerjee, Co-head of Research Study at Equitymaster for her view on both banks.

Here's what she had to say ...

While the regulatory scenario for fintech's is still developing, there is no doubt that the sector provides huge opportunity.

Both, the incumbents i.e.

the existing tech focussed banks like HDFC Bank and ICICI Bank in addition to the new age players with specific niche ingenious fintech offerings, have room for growth.Which is much better? If we compare the two count on credit development then both banks are growing their loan book almost at an equal rate throughout the interest cycle.However, if we compare them on the credit quality, HDFC Bank is far ahead than ICICI Bank.

HDFC Bank has actually reported regularly lower and steady NPAs throughout the interest cycle whereas ICICI Bank's credit quality has fluctuated a lot and is fairly unsteady.

On the net interest margin front too, HDFC Bank scores better than ICICI bank.

Nevertheless, ever since the management of ICICI Bank was revamped with Sanjay Bakshi taking charge, there has been an extreme enhancement in the bank's efficiency.

It's inching closer towards HDFC Bank in terms of monetary efficiency.

This is something that needs to be noted.

This article may have made things much easier for you, we highly advise you to inspect the principles and assessments of both these companies on your own.Disclaimer: This post is for info purposes just.

It is not a stock recommendation and should not be treated.(This article is syndicated from Equitymaster.com)(This story has not been edited by TheIndianSubcontinent staff and is auto-generated from a syndicated feed.)