India’s three largest private sector banks - ICICI Bank, HDFC Bank and Axis Bank - reported good numbers for the quarter ended March 2012, with ICICI Bank and Axis Bank surprising analysts positively to some extent. Despite the macro headwinds of slowing credit demand as well as high interest rates, the three banks were able to deliver healthy growth in loan book. Growth in fee income was largely good, even as they were able to hold on to their asset quality. Going ahead, while analysts remain largely positive on ICICI Bank and Axis Bank, they also see some concerns on slowing loan and earnings growth (ICICI Bank) and asset quality risk (Axis Bank). However, for HDFC Bank, which is relatively better placed, high valuations may cap any upside.
Loan growth: Mixed trends
All the three banks posted loan growth ranging from 17 to 22 per cent, with HDFC Bank leading the pack. While strong retail demand fuelled loan growth for HDFC Bank and Axis Bank, it remained sluggish for ICICI Bank. ICICI Bank’s loan growth at 17 per cent was the lowest among the three; slightly lower than its own trend (about 20 per cent) seen in the last four to five quarters.
Given that policy rates (repo) are unlikely to come down in a hurry, the outlook on loan growth appears to be mixed. Analysts expect loan growth of HDFC Bank and Axis Bank at about 20 per cent each for FY13. For ICICI Bank, this is expected to moderate to 15 per cent.
Asset quality woes not over yet
Contrary to their peers in the public sector space, private banks have done much better on the asset quality front with adequate provisioning and net non-performing assets (NPAs) below one percentage point of loans. The flip side is that all three banks continued to add to their restructured loans kitty (which means higher risk of slippages). Hence, analysts remain cautious on this front. While HDFC Bank appears relatively well placed compared to its peers on asset quality (as large part of the loan book is from the high quality retail segment), these pressures could rise for both ICICI Bank and Axis Bank in FY13. For instance, while ICICI Bank’s gross and net NPAs have been trending down in the last 8-12 quarters (indicating improving asset quality) and is at comfortable levels, it has also seen a gradual increase in stressed assets (absolute value and as a percentage of loans) in recent quarters and needs to be monitored.
On profitability, ICICI Bank as well as HDFC Bank clocked marginal gains in net interest margins (NIMs) on a sequential basis for the March quarter. In fact, ICICI Bank’s NIM at three per cent is its highest in three years (aided by better cost management and reduced losses on securitisation). Notably, its management expects margins to inch up further in FY13. While Axis Bank’s NIMs contracted 20 basis points, it was on expected lines as the bank was posting high NIMs in the past few quarters. In FY13, analysts expect NIMs of all the three banks to hold on to these levels, largely driven by judicious re-pricing of loans, as well as deposits.
Outlook
Most analysts are confident on HDFC Bank and believe it will continue to post good numbers on a sustained basis. They term it a low-risk investment, even as they see some moderation in FY13. Sachin Sheth, Tejas Mehta and Todd Dunivant, analysts at HSBC, wrote in a recent report, “HDFC Bank’s historical trajectory of 30 per cent plus earnings growth is likely to slow to our estimated 23-24 per cent, given the poor macro environment, slower credit cycle as well as a bottoming out of credit costs. We reiterate our ‘Overweight’ rating on the stock. The flip side is that high valuations of 3.4 times FY13 estimated book value may cap significant upsides for the stock from here on.
| PROFIT GROWTH MODERATING | ||||||
| In Rs crore | ICICI Bank | HDFC Bank | Axis Bank | |||
| FY12 | FY13E | FY12 | FY13E | FY12 | FY13E | |
| NII | 10,734 | 12,633 | 12,146 | 14,838 | 8,018 | 9,889 |
| % chg | 19.0 | 17.7 | 15.2 | 22.2 | 22.2 | 23.3 |
| Total income | 18,237 | 21,740 | 17,374 | 21,434 | 13,438 | 16,578 |
| % change | 16.4 | 19.2 | 16.4 | 23.4 | 20.0 | 23.4 |
| NIM (%) | 2.6 | 2.6 | 4.2 | 4.2 | 3.1 | 3.2 |
| Change (bps) | 10.0 | 0.0 | -20.0 | 0.0 | -10.0 | 10.0 |
| Net profit | 6,465 | 7,470 | 5,204 | 6,151 | 4,242 | 5,104 |
| % change | 25.5 | 15.5 | 32.5 | 18.2 | 25.2 | 20.3 |
| Price/Bk Value (x) | 1.6 | 1.5 | 4.0 | 3.4 | 2.0 | 1.7 |
| ROE (%) | 11.2 | 11.6 | 18.9 | 19.1 | 20.3 | 20.5 |
| Loan growth (%) | 17.3 | 14.8 | 23.5 | 21.0 | 19.2 | 20.0 |
| Net NPA (%) | 0.8 | 0.9 | 0.2 | 0.2 | 0.3 | 0.7 |
| E: Estimates; NII is Net Interest Income; ROE is Return on Equity Source: Analyst reports | ||||||
For ICICI Bank, while most analysts have a ‘buy’ on the stock, its earnings growth is likely to moderate and asset quality is expected to bear more pain compared to peers. Flattish deposit and fee income growth are also some areas of concern. Aditya Narain, Manish Chowdhary and Pooja Kapur of Citigroup, who have a ‘buy’ rating on the stock with a target price of Rs 1,035, wrote in a recent report, “There are structural/growth issues that still need to show more decisive direction and momentum. These include a) deposit growth – flat year-on-year; b) fee income growth; flat – not so for peers; c) unpredictable offshore book, and d) asset quality – restructuring still on, and some defensiveness on account of a few names. There remains work to be done apart from normalising ROE (return on equity) further and there remain questions.” Any positive surprise on these fronts will act as a catalyst for the stock, wherein valuations are relatively lowest among the three.
Strong earnings and loan growth will support Axis Bank’s valuations, believe analysts. The bank has managed to improve asset quality in FY12 but the rating profile of its major clients has been reduced significantly. Kashyap Jhaveri, Pradeep Agrawal and Aalok Shah of Emkay Global say, “We are still factoring in lower 13.4 per cent growth in earnings next year. NIMs may continue to remain under pressure and the downgrading in the loan rating profiles may spike up restructuring and, consequently, provisions.” This asset risk will be an overhang on the stock in the near term.
