ICICI Bank vs HDFC Bank: Which is the better bet?

ICICI Holdings may have completed its 5% stake placement for USD 500 million, sources said, adding that ICICI Holding may have placed stake to multiple investors and the valuation of ICICI Holding may work out to USD 10.2 billion.

This company was recently created by ICICI to hold its 74% stakes in the life and general insurance business. Sources confirm that it has pegged the valuation of its life insurance business, ICICI PruLife, at USD 6-7 billion and the non-life or general insurance at USD 2-3 billion. The 51% stake in ICICI Prudential Asset Management is being put at USD 1 billion.

ICICI Prudential and ICICI Lombard will continue to require large dollops of capital as the life insurance business is growing at 104% annually while the general insurance business is clocking a growth of over 88%.

On the other hand, HDFC Bank will raise Rs 3,114 crore via its preferential offer to Carlyle Group. The HDFC preferential issue consists of 1.8 crore equity-shares, which is 7.11% of the total issued and paid-up capital.

The Carlyle Group will hold 5.6% in HDFC after the preferential issue. HDFC plans to use a part of the money for its insurance business, which needs over Rs 600 crore every year. Part of the funds would be used to maintain HDFC stake in HDFC Bank, said Renu Karnad, ED, HDFC Bank.

The BSE Bankex is up 97 points to 7,564. On the BSE, the ICICI Bank stock is up Rs 10, at Rs 923, while the HDFC Bank stock is up Rs 56 to Rs 1,125. CNBC-TV18 spoke to analyst Hemindra Hazari of Karvy Stock Broking to find out which of the two banks is a better bet.

He is a bit surprised with the timing of the ICICI Bank issue as its results were not up to the mark. "The ICICI Bank issue was a bit of a surprise as when they announced their equity issue, their results were not up to the mark. There is a concern that its RoE may take a hit, so the market is sensitive to ICICI Bank's announcement. On the other hand, HDFC Bank is a very profitable bank. They have made it clear that they are not interested in increasing their market share but they want to grow profitably. In the case of HDFC Bank, the concerns of maintaining profitability are much less than in the case of ICICI Bank," he said.

Hazari feels there is huge difference in both the banks raising of equity. "There is a big difference between ICICI Bank's raising of equity and HDFC Bank's raising of equity. ICICI Bank is using these proceeds to fund its own growth, which is expected to remain high, and its investments in other subsidiaries, which require very large capital like its insurance business. For HDFC Bank, there are no such subsidiaries and hence there is no such concern for the mortgage lender. That's why ICICI Bank requires to raise a larger capital than HDFC Bank," he said.

He sees no problem in banks coming to the market to regularly raise capital. "HDFC needs to maintain a minimum CAR of 12% as they are an NBFC. While in the case of ICICI Bank and HDFC Bank its 9%. Given the fact that the economy is growing, banks need to provide credit so that the economy can continue to grow. We would expect banks in an emerging economy, with high economic growth rates, to regularly come to the market to raise capital.

Hazari prefers HDFC Bank to ICICI Bank. "My first preference would be HDFC Bank as the risks are much lower than in the case of ICICI Bank. One is the sheer size of the issue in the case of ICICI Bank compared to HDFC Bank and the extent of dilution. Secondly, its not very clear whether there will be an ICICI Holding and who will fund the insurance venture. Excluding that, one will find that ICICI Bank has a huge retail exposure and that has been showing some stress in the economy. If there is some problem say on the leverage side and ICICI Bank has really leveraged itself very highly in that area, then there are always going to be concerns. While we do not see these concerns in HDFC Bank," he added.