ICICI Bank, Axis turn weakness into strength as investors lap up shares

With best-in-class CASA, retail loan portfolios and better quality corporate loans, the banks have found their way back on investors' radar

With foreign investors lapping the shares of Axis Bank and ICICI Bank, and Indian investors (including ‘big bull’ Rakesh Jhunjunwala) are turning optimistic, the two lenders certainly got something right over the years.

The year 2018 has rewarded them with stock gains of 9–14 per cent so far, top performers among the private peers. The thumbs-up from the Street is largely backed by fundamentals, which have turned favourable.

The two banks have converted some of their weaknesses to strengths in the process of cleaning their books after the Reserve Bank-ordered Asset Quality Review (AQR). Since FY16, their corporate exposure was a key sore point, as it was dominated by low-rated borrowers. 

Their relatively weaker penetration into retail assets (loans to small borrowers) wasn’t appreciated, either. Even on Casa (current and savings account) deposits, experts pointed to scope for improvement.

However, over the past 16 quarters, even as the cleaning of loan books remained the top priority, they didn’t lose sight of areas where they could do better. The results are bearing fruit and the September quarter results reflects these. The Casa ratios of both lenders have improved, the share of low-rated corporate assets has seen a steady decline and loan accounts rated ‘A’ and above (perceived as better quality borrowers) has risen.

More important, the share of retail loans has seen an increase. A diversified retail book (comprising home loans, loans to small businesses and automobile loans), apart from credit card and personal loans, cushion the banks with asset-backed retail portfolios.

The good news is that the share of bad loans or non-performing assets (NPA) hasn’t risen much. The gross NPA ratio has stood at less than two per cent (as a proportion of advances) over the years. 

As consumer sentiment remains strong, the Street doesn’t expect any surprises from this segment in the medium term.

The appealing valuations of ICICI and Axis, at 1.8 times the two times the estimated FY20 books, respectively, also make for a strong investment case. For Macquarie Capital, the former is their top pick in the financials space. Its research analyst, Suresh Ganapathy, says happy days are back for the bank. Analysts at Jefferies say similar things for Axis’ stock. “With the uncertainties regarding asset quality now behind and the bank focusing on core profitability, we believe the stock provides a good buying option at these relatively attractive valuations,” they say.

Some hurdles remain. For one, experts say with a new management taking over, one needs to watch for major changes in the system. While the impact might not be much for ICICI, given that a well-regarded insider (Sandeep Bakhshi) has taken charge, this might not hold good for Axis. “What Amitabh Chaudhary can bring to the table, given his insurance background, needs to be seen,” says an analyst with a foreign brokerage.

Analysts at Nomura also caution that large additions to the stressed pool, slower than expected recovery of net interest margins and higher than anticipated delinquency are key risks to the stocks.

As the expectations are high from both, there’s little room for error from the current levels.