Axis vs ICICI Bank: Both have similar risk profile in asset quality terms

Illustration by Binay Sinha
With the benchmark indices scaling new heights every other day, the two competing private banks, Axis and ICICI, are among the major gainers. Their shares have, in fact, outperformed the indices by a big margin in the past month, with Axis up 17 per cent and ICICI up 23 per cent in the period.  

The debate among investors, especially after the June quarter (Q1) results, is about which of the two stocks is a better 'buy'. This is because Axis outperformed ICICI in the past six-month and 12-month periods but the latter seems to be catching up. A majority have a positive view on both lenders.

However, better-than-estimated Q1 numbers somewhat tilt the scale in Axis' favour, say analysts. With this outperformance, Siddharth Purohit of SMC Institutional Equities feels the preference for the Axis stock could increase in the coming weeks. 

In the medium-term, too, the Street seems to have a more positive bias for Axis Bank. That the stock has reclaimed the Rs 600 mark, earlier seen in January, also leads to optimism. Much of Axis' anticipated trouble from its loan watchlist (accounts classified as weak, with potential to default) has been absorbed and the bank is not expected to spring new surprises.

Also, even as Axis Bank has leadership issues, which analysts at CLSA believe is a key monitorable, the ongoing investigation into it could be a bigger black box for ICICI, explaining the valuation difference between the two.

Pricing-in part of these worries, the ICICI stock trades at 1.8 times the FY20 book value, while Axis commands an asking rate of 2.3 times, a little over 20 per cent more than its larger peer. The benign valuation has prompted Morgan Stanley to increase ICICI Bank's weight in its Asia banks portfolio to 15 per cent, making it the heaviest of a single stock, partly the reason that propelled its stock price rise on Thursday.

Purohit says it is still ICICI's management issues that are really causing the rift in an otherwise similar situation. "Once this is resolved, the gap should be bridged," he affirms. 

His confidence stems from the fact that the valuation gap, 35 per cent a year before, has reduced over time. Both stocks are closely tracked and there's constant interest to find which is the winner in the race to end the bad loan spell. 

Yet, both banks face similar asset quality issues. Axis and ICICI had gross non-performing asset (NPA) ratios of below two per cent in FY15, a year prior to the Reserve Bank of India enforcing asset quality review (AQR) for the sector. Their current ratios are at least two to three times more than the pre-AQR FY15 levels.

While both banks appear at the end of the bad loan recognition cycle, the relatively higher share of old loans will keep segment losses elevated. However, ICICI shoulders a much larger watchlist at Rs 44 billion, compared to Rs 12 billion for Axis. Q1's disclosure of Rs 121 billion of low-rated corporate loans, which could turn bad, might compound the trouble for ICICI. 

In addition, Morgan Stanley warns that a macroeconomic slowdown and further pick-up in bad loans are key risks, apart from the investigations around the management and accounting for bad loans. "News flow could keep the stock volatile," the brokerage cautions.

Further, while both have absorbed the likely losses from loan accounts recommended for resolution under the insolvency code, recent buzz suggests there could be a third list of bad loans the sector would need to take to the National Company Law Tribunal for resolution. Whether they could withstand another round of mandatory recognition of bad loans without leaving a deeper scar on their financials needs to be seen.

In sum, when both banks carry almost the same risk profile in terms of assets, a quarter or two's performance isn't adequate to alter the reward potential.     

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