Axis Bank vs ICICI Bank: Which bank looks more attractive at current levels? Know more here

In 2015, when the banking sector faced an asset quality crisis, both of these banks were among the most severely affected by private sector banks. Around the same time, both ICICI and Axis experienced changes in leadership. What differentiated these changes were the circumstances surrounding them and the choices leaders made.

While ICICI Bank retained its long-serving and seasoned internal executive for the MD & CEO position, Axis Bank made a bold move by appointing an expert from the insurance sector. This revamped strategy is also reflected in their stock prices. Over the past three years, Axis Bank and ICICI Bank have delivered impressive returns of 143 % and 167 %, respectively.

Interestingly, a notable shift has occurred. Historically, Axis Bank used to trade at a premium compared to ICICI Bank, especially before 2018, due to certain aspects of its business approach. Now, this dynamic has reversed, with ICICI Bank commanding significantly higher valuations. It is trading at over 2.3 times the expected price-to-book ratio for fiscal year 2024, while Axis Bank, the third-largest private bank, is at a 30% discount to its immediate peer.

This substantial change in relative valuations prompts a re-evaluation of how investors should approach these stocks. Considering the current multiples, Axis Bank appears relatively attractive compared to ICICI Bank, despite its substantial stock price increase in the past year (44%). The bank’s historical peak multiples have ranged from 2.9 to 3.1 times the price-to-book ratio.

So, why Axis Bank could have an edge over ICICI Bank in the coming quarters?

Profitability 

In Q1FY24, Axis Bank recorded a net interest margin (NIM) of 4.1%, which is a metric indicating profitability. Among the top five private banks, Axis Bank is trailing in this aspect. This is noteworthy, especially considering that its NIM has increased from 3.3% in fiscal year 2022. In the same quarter, ICICI Bank outperformed Axis Bank with an NIM of 4.8%. The potential for further enhancement of NIM is contingent on the ability of banks to promote high-yield products, particularly unsecured retail loans like credit cards, personal loans, and microfinance loans, as well as the adjustment of deposit pricing.

Although both ICICI Bank and Axis Bank have experienced faster growth in unsecured retail products compared to mortgages in the past year, Axis Bank appears to have a more favourable path ahead in terms of balancing its retail portfolios. This is particularly evident in their renewed focus on rural banking, primarily through microfinance institution (MFI) loans.

While there may be challenges related to costs and liabilities, Axis Bank’s capacity to improve or at the very least maintain margins seems to be stronger than that of ICICI Bank. Furthermore, the complete absorption of the Citibank India retail business in the March quarter of fiscal year 2023 further supports Axis Bank’s ability to concentrate on growth.

Comparison of key ratios as of FY23:

Return profile of Axis Bank 

As a result of enhanced earnings quality, Axis Bank has a greater potential for improving its return profile. Banks, overall, have experienced a notable enhancement in their return metrics between fiscal year 2020 and fiscal year 2023. This improvement stems from a marked enhancement in asset quality, as legacy loans have been addressed, and the adverse effects of the COVID-19 pandemic have been reasonably managed.

Starting from a low point of 0.19% return on assets (ROA) and 2.1% return on equity (ROE), Axis Bank has made significant strides, reaching 1.76% ROA and 18.3% ROE in fiscal year 2023. ICICI Bank has also shown notable improvement in its return metrics during this period, with ROA increasing from 0.77% in fiscal year 2020 to 2.13% in fiscal year 2023, and ROE growing from 8% in fiscal year 2020 to 18.4% in fiscal year 2023. This improvement is indeed substantial.

Conclusion 

Looking ahead, the potential for further revaluation of their return profiles will depend on the enhancement of operational efficiencies, as both Axis and ICICI Banks are approaching a similar threshold in terms of slippages or credit costs, as indicated in the table. Axis Bank may have a competitive edge over ICICI Bank in this regard, as its operational strengths have not yet fully translated into financial figures until fiscal year 2023, placing the bank at a pivotal turning point. Hence, Axis Bank’s growth trajectory appears to have more potential, unless an unforeseen issue regarding asset quality emerges, particularly in the unsecured lending segment.

Disclaimer:This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.