Standing out in a tough environment

While the near-term outlook remains healthy for top private banks, ICICI Bank and Axis Bank are trading at attractive valuations vis-a-vis HDFC Bank, say analysts.

Amid a slowing economy and rising interest rates — and the pressure on growth, profitability and asset quality, as a result — banking stocks have taken a beating in the last few months. Against this backdrop, ICICI Bank’s performance for the September quarter can be considered strong. Its asset quality improved, margins remained stable and net interest income (NII) rose a healthy 14 per cent year on year. In fact, its private peers, HDFC Bank and Axis Bank, also put up a good show in the quarter. Though the top line growth was along expectated lines, the bottom line exceeded estimates on the back of lower provisioning.

Vaibhav Agarwal, analyst at Angel Broking, said, “ICICI Bank’s operating performance was in line with our expectations. Provisioning was lower than expected. ICICI Bank’s numbers were better than Axis Bank’s, especially on the asset quality front.” Shares in ICICI Bank closed 0.26 per cent down at Rs 930.50, against a 0.56 per cent decline in the Sensex.
 

ICICI BANK: STABLE LOAN GROWTH
Loan growth y-o-y (%)	ICICI Bank	HDFC Bank	Axis Bank
Q1 '11	-6.9	40.9	39.1
Q2 '11	1.8	38.2	36.5
Q3 '11	15.3	33.1	45.7
Q4 '11	19.4	27.1	36.5
Q1 '12	19.7	20.0	21.4
Q2 '12	20.0	25.6	26.7
Source: Companies

 

HOLDING ON TO MARGINS
In Rs crore	ICICI Bank	HDFC Bank	Axis Bank
Net interest income	2,506	2,526	2,007
Y-o-Y chg (%)	14	17	24
Net interest margin (%)	2.6	4.1	3.8
Y-o-Y chg (bps)	-	-10	10
Q-o-Q chg (bps)	-	-10	50
Net profit	1,503	912	920
Y-o-Y chg (%)	21.6	31.5	25.0
Net non-performing assets (%)	0.8	0.2	0.3
Y-o-Y chg (bps)	-57	-10	-

Q-o-Q chg (bps)-11

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3 Source: Companies All figures pertain to the September 2011 quarter

Going ahead, analysts expect the three banks to post healthy performance. However, most of them prefer Axis Bank and ICICI Bank due to relatively lower valuations. “We are bullish on all the three banks and expect 20 per cent upside each for Axis and ICICI. Given HDFC Bank’s rich valuations, we expect around five per cent gains from the current levels,” said Agarwal.

Manish Chowdhary and Aditya Narain of Citigroup said, “Axis remains our preferred pick in the sector, given low relative valuations versus peers (40 per cent plus discount to HDFC Bank), greater leverage to the macro cycle and healthy deposit franchise. Given strong out-performance and premium valuations, we remain neutral on HDFC Bank.”

LOAN GROWTH, ASSET QUALITY
While Axis and HDFC Bank reported annual loan growth of over 25 per cent each in the September quarter, ICICI Bank’s loans grew by 20 per cent. Though retail sector loans fuelled loan growth for HDFC Bank and Axis, ICICI witnessed higher growth in its corporate loans, as it trimmed focus on unsecured retail loans. While incremental loans in the corporate segment were primarily towards working capital and ongoing loans for these banks, most of the incremental demand in the retail segment was driven by home loans, commercial vehicles and car loans. However, all the three banks admitted they witnessed near freezing up of demand for new capital expenditure-related corporate loans. It is crucial the capex cycle picks up, otherwise it could impact growth rates of the sector and these banks in the next financial year.

ICICI Bank lagged its peers in terms of fee-income growth, which came in at seven per cent y-o-y (partly attributable to slower retail loan growth), against growth of 20 per cent for HDFC Bank and 32 per cent for Axis.

Asset quality trends were broadly stable for the trio. ICICI Bank continued to improve its asset quality and reduced its net non-performing assets (NPAs) for the 10th quarter in a row. Thanks to the completion of provisioning for its unsecured retail loan book, its provisioning halved on a y-o-y basis to Rs 319 crore, which helped the bank post a higher-than-expected rise in profits. Unlike HDFC Bank, which was able to maintain its net and gross NPA ratios, Axis Bank witnessed some pressures on this front. Albeit marginally, Axis Bank’s gross NPAs expanded by two basis points (bps) over the June quarter, while its net NPAs were up by three bps sequentially.

Despite the stable asset quality, HDFC Bank is hawkish and does expect some pressures to creep in going forward. Given the loan portfolios and lesser exposure to troubled sectors like power and infrastructure, analysts feel HDFC Bank and ICICI are better positioned to face asset quality challenges. The ICICI Bank management today ruled out any major negative shock in the near term on its asset quality front.

STABLE MARGINS
Despite high interest rates, most banks managed to maintain their net interest margins (NIMs). ICICI Bank held on to its NIMs on both sequential and annual basis. While HDFC Bank witnessed a 10 bps fall in its NIMs, Axis registered handsome gains. Notably, this margin expansion was driven by higher base rates (raised twice in the September quarter) and strong growth in current accounts and savings account deposits. However, Axis’ management believes the current NIM levels are not sustainable and expects it to be in the range of 3.25-3.5 per cent this financial year. HDFC Bank, on the other hand, expects its margins to hover between 3.9-4.2 per cent for 2011-12. ICICI Bank expects to maintain its NIMs at the current levels.

Going ahead, it will be interesting to see how the banking sector reacts to the Reserve Bank of India’s move of deregulating the savings bank rate, which could have a bearing on their NIMs. While a few smaller banks like YES Bank, Kotak and IndusInd have raised their savings deposit rates, other banks are in a wait-and-watch mode.