BETTER BUY: AXIS BANK OR ICICI BANK?

Both have outperformed indices and carry similar risk profile in terms of asset quality

With the benchmark indices scaling new highs every other day, the two competing private banks, Axis and ICICI Bank, 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 Bank in the past six-month and 12month 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 tilts the scale in favour of Axis, say analysts. With this outperformance, Siddharth Purohit of SMC Institutional Equities feels the preference to 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 ~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. 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 a reason which 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 preAQR 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 ~44 billion, compared to ~12 billion of Axis. Q1’s disclosure of ~121 billion of lowrated corporate loans which could turn bad might compound the trouble for ICICI Bank.