It has taken three years for Axis Bank and ICICI Bank to win back the Street’s faith. Sentiment was already turning in favour of the two banks, and got stronger with the December quarter (Q3) results. These showed their asset quality woes were well behind them.
The two are now the most favoured picks among private banking stocks. Analysts polled on Bloomberg ascribe a 12-month target price of Rs 430 (20 per cent upside) for ICICI Bank’s stock, while those at CLSA have increased their weight on the Axis Bank stock in its model portfolio.
The headline numbers were divergent in Q3, but experts say many similarities are beginning to emerge for the two banks. Starting from softening of asset quality pain to trends in the loan book, liability profile and, more importantly, a new management taking charge — analysts say the trends appear very similar.
With this, the hope is that the valuation discounting between ICICI and Axis should minimise. “Investigation reports state ICICI Bank doesn’t have to suffer fresh losses due to financial frauds, which should help gap-down (its) valuation discount to Axis,” says Siddarth Purohit of SMC Capital.
On performance, Axis scored a shade over ICICI in Q3. Net interest income (NII) growth was the best in 10 quarters and pushed net profit up 137 per cent year-on-year to Rs 1,681 crore. At ICICI, despite a 20 per cent increase in NII, its net profit declined 2.7 per cent to Rs 1,605 crore, largely as provisioning costs expanded 19 per cent to Rs 4,244 crore. On the positive side, its gross non-performing assets (NPAs) fell to 7.75 per cent of loans (8.54 per cent in Q2) and the net NPA ratio at 2.58 per cent is the best since the asset quality review in December 2015.
In terms of common positives, the noticeable one is a sharp decline in below-investment grade loan dues. It has fallen to 1.6 per cent of Axis Bank’s book and 3.3 per cent of ICICI’s.
Likewise, both derive over half their business from retail (individual or small borrowers) assets at the moment. Faster penetration in segments such as credit cards, personal loans, small business loans and home loans have aided growth. Also, with the share of low-cost current account–savings account (Casa) deposits at 48 per cent, the two take a lead over peers in this aspect.
However, more stable growth in Casa is required, given that it has come off the 50 per cent mark for both banks in Q3. Likewise, with a provision coverage ratio upward of 75 per cent, the banks might not be susceptible to major asset quality shocks, going ahead. For Axis, the 18 per cent return on equity (RoE) target put out by its new management has gone down well with investors. “Uptick in top line and normalising credit cost, which should lead to a comfortable 14–15 per cent RoE by FY21,” said a note by Prabhudas Liladhar.
For ICICI Bank, analysts at Kotak Institutional Equities point to a sharp improvement in the return profile. “We see scope for valuations to re-rate as investors are getting firm visibility in improvement in asset quality and recovery in RoE,” they add. With both moving in the right direction, ICICI and Axis are preferred picks in the financials space for Nomura. That said, analysts also caution that the margin for error is extremely low for both banks. “Expectations are high from Axis and ICICI. One quarter of a miss on any count could cost them a lot,” Purohit warns.