ICICI Bank has staged an amazing turnaround. Is it overvalued now?
₹3400 crore in March 2019. It’s around ₹42,200 crore - Book value was ₹1.08 trillion. It’s ₹2.53 trillion at June quarter end.
A CAGR of 16.7% - Price was ₹400 in March 2019. It’s around ₹1,220 today. A CAGR of 23% Fast forward to today, its PB trades at 34% premium to HDFC Bank and a small 1-2% premium to Kotak Mahindra Bank.
This implies ICICI Bank offers significantly better future prospects compared to HDFC Bank. But, this conclusion is worth questioning. First, compare their book value per share (BVPS) growth.
A better way to compare two banks is to look at BVPS growth rather than Earnings per share (EPS) growth. This is because provisioning expenses cause banks' earnings to vary. This can differ from bank to bank, which complicates comparisons.
In contrast, Book Value exhibits greater consistency and is less susceptible to variations. ICICI Bank has grown BVPS by 0.5% more than HDFC Bank in the last three fiscal years. Hardly a meaningful difference.
Of course, book value growth is just one important factor that drives valuations. What about asset quality? Gross non-performing assets (GNPA) of ICICI Bank has improved from 5.3% to 2.1% between March 2021 and June 2024. During this period, HDFC Bank's GNPA went from 1.3% to 1.2%.
Even after the HDFC Bank merger, it has better asset quality than ICICI Bank. It is also consistent across cycles. Can ICICI Bank's asset quality endure a downturn as well as HDFC did? Only time will tell.
If not recent BVPS growth or asset quality? What justifies this premium? What about Return on equity (ROE), an important indicator of a bank’s profitability. Between FY21 and FY24 ROE of ICICI Bank has improved from around 13% to 19%. HDFC Bank's ROE decline marginally from 17% from 16.6%
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