BackICICI Bank vs Axis Bank: Which bank stock is better?
The economy is recovering from the effects of the pandemic and the demand for credit is steadily going up. Which bank has a better chance to expand its asset base?
PremiumThe banking industry has evolved a lot in the last two centuries with technology taking it to new heights.
Though people initially feared digital banking, they quickly adapted to it making it easy for the banks to provide services at low costs.
With the working population growing their disposable income will also go up and the use of digital banking will further surge, making it easy for the banks to grow further.
In this article, we compare two banks, ICICI Bank and Axis Bank, that are at the forefront of leveraging technology to grow their businesses.
Business Overview
ICICI Bank is a large private sector bank in India. It offers a diversified portfolio of financial products and services to retail, small and medium-sized enterprises (MSE), and corporates.
Through its subsidiaries, it has a wide presence across financial services such as insurance, asset management, merchant banking, and brokerage.
The bank leverages technology to offer financial services through digital channels such as internet banking, mobile banking, and digital banking kiosks.
Axis Bank, on the other hand, is the third-largest private sector bank in India.
It offers an entire range of financial products to its key customer segments such as large and mid-corporates, micro, small and medium-sized enterprises (MSME), agriculture, and retail.
The bank also offers asset management and brokerage services through its subsidiaries.
It has been at the forefront of offering digital banking services to its customers and is adopting new technologies such as the cloud to improve the customer experience.
Net interest income and margin
For a bank, interest is the major source of both income and expense. It earns interest on loans and advances and pays interest on deposits.
The difference between these two is the net interest income. A high net interest income is a sign of good quality assets which ultimately translates into profits for the company.
Net interest margin is derived by dividing the net interest income by average loans and advances. It indicates how well the bank is generating interest income from its loans and advances.
A high net interest margin is considered good.
The net interest income for ICICI Bank has grown at a CAGR of 12.4% in the last five years, and Axis Bank saw a slightly lower growth of 10.1% during the same period.
For ICICI Bank, an increase in the volume of interest-earning assets coupled with a lower cost of deposits drove the growth of net interest income.
On the other hand, Axis Bank’s growth in net interest income was led by an increase in loans and advances, but this was partially offset by a higher cost of deposits and lower yield on assets.
In terms of net interest margin, Axis Bank is slightly ahead of ICICI Bank with a five-year average net interest margin of 3.52%. ICICI Bank's five-year net interest margin stands at 3.46%
Profitability
The profitability of a bank can be assessed using the parameters - operating profit margin and net profit margin.
Operating profit is the profit earned purely from a bank’s core operations. The operating profit margin is the ratio of operating profit and revenue.
Net profit margin, on the other hand, is the total profit earned from operating and non-operating activities as a percentage of revenue.
The higher the profit margins, the better.
The five-year average operating margin of ICICI Bank stands at 20.3%. Axis Bank is lagging behind with a five-year average of 10.3%.
ICICI Bank is again leading in terms of net profit margin with a five-year average of 15.4% against 6.6% of Axis Bank.
Growth in net interest income and non-interest income over the years have contributed to the profits of both companies.
The five-year average operating margin of ICICI Bank stands at 20.3%. Axis Bank is lagging behind with a five-year average of 10.3%.
ICICI Bank is again leading in terms of net profit margin with a five-year average of 15.4% against 6.6% of Axis Bank.
Growth in net interest income and non-interest income over the years have contributed to the profits of both companies.
Deposits
For a bank, deposits are the primary source of funds. This is because a bank uses deposits to disburse loans and earn revenue in the form of interest.
Also, the size of the deposit base shows how much the customers trust the bank with their money. The larger the deposit base, the higher is the customer's trust and the greater is its reputation.
ICICI Bank’s deposits are almost 1.3 times that of Axis Bank indicating a high customer loyalty for the former.
Both the banks have been consistently growing their deposits over the years, however, ICICI Bank is slightly ahead of Axis Bank in terms of deposit growth.
In the last five years, ICICI Bank’s deposits have grown at a compound annual growth rate (CAGR) of 13.4% against 11.3% of Axis Bank.
ICICI Banks' deposits grew due to growth in term deposits, while Axis Banks’s deposit growth was led by growth in customer base, current and savings account deposits, and term deposits.
For a bank, deposits are the primary source of funds. This is because a bank uses deposits to disburse loans and earn revenue in the form of interest.
Also, the size of the deposit base shows how much the customers trust the bank with their money. The larger the deposit base, the higher is the customer's trust and the greater is its reputation.
ICICI Bank’s deposits are almost 1.3 times that of Axis Bank indicating a high customer loyalty for the former.
Both the banks have been consistently growing their deposits over the years, however, ICICI Bank is slightly ahead of Axis Bank in terms of deposit growth.
In the last five years, ICICI Bank’s deposits have grown at a compound annual growth rate (CAGR) of 13.4% against 11.3% of Axis Bank.
ICICI Banks' deposits grew due to growth in term deposits, while Axis Banks’s deposit growth was led by growth in customer base, current and savings account deposits, and term deposits.
Loans and advances
Interest earned on loans and advances is the primary source of income for the banks. Hence the growth of loans and advances is considered vital for a bank.
Ideally, a bank’s deposits and loans should grow at an equal rate. However, banks disburse fewer loans in the case of weak economic conditions to avoid bad loans on their books.
Axis Bank is leading in terms of growth of loans and advances with a CAGR of 10.7% in the last five years against a 9% CAGR of ICICI Bank.
Axis Bank’s growth in advances was led by growth in MSME and retail sector, whereas for ICICI Bank the growth was led by domestic advances, which was partly offset by overseas advances.
While both the banks couldn’t keep up with the pace of growth in their deposits, Axis Bank managed to keep the difference below 1%.
In terms of advances to deposit ratio both the banks have a five-year average of 92.6%. This means for every ₹100 they collect as deposits the banks are giving ₹92.6 as loans and advances.
Non-performing assets (NPAs)
An asset is marked as an NPA if it isn’t earning interest for more than 90 days. A rising NPA in the books of banks can be a cause of concern as it affects the bank’s profitability.
To gauge the level of NPAs on a bank’s books we can look at net NPAs. Net NPAs is a measure of non-performing assets as a percentage of total loans. The lower the percentage, the better.
The five-year average net NPA of ICICI Bank is 2.9% which is higher than Axis Bank’s average of 2%.
Though both the banks have a higher average, they have seen their net NPA reducing over the years mainly due to the stringent due diligence framework in place.
Provisions
Banks are required to set aside provisions for the NPAs. This will help them in compensating for the money lost due to an NPA. Hence a bank should have enough provisions, despite it being a major expense that will drag down the profit.
By looking at the provision coverage ratio we can tell whether the bank has set aside enough provisions for its NPAs. It’s a measure of provisions upon gross NPAs.
The Reserve Bank of India has set a benchmark of 70% for the provision coverage ratio. Both the banks have set aside enough provisions for their NPAs in the financial year 2021.
Post the pandemic, both banks have proactively set aside higher provisions in case there is a surge in NPAs.
Capital Adequacy Ratio
Capital adequacy ratio is a measure of capital the bank has against its risk-weighted credit exposures.
The Basel III norms mandate banks to have a minimum capital adequacy ratio of 12% so they have enough capital on reserve before facing insolvency risk.
The five-year average capital adequacy ratio for ICICI Bank and Axis Bank is 17.6% and 16.8% respectively. This indicates that both the banks have enough capital as a reserve.
Banking network
ICICI Bank has an extensive network of customer touchpoints in the form of branches, ATMs, kiosks, and cash acceptance machines.
Currently, it has over 5,300 branches, 15,200 ATMs, 2,700 cash acceptance machines, and close to 1,800 insta-banking kiosks.
Axis Bank, on the other hand, has close to 4,600 branches, over 11,300 ATMs and 5,700 cash deposit/withdrawal machines. It also has six virtual centres and over 1,500 virtual relationship managers as of 31 March 2021.
Dividend
Dividend is the profit that is distributed to the shareholders in case the company has excess cash flows and no immediate expenses to pay for.
To assess the dividend-paying capacity of a bank, we can use two ratios - dividend payout ratio and dividend yield.
The dividend payout ratio measures how much dividend a company pays from its earnings. On the other hand, dividend yield measures what percentage of the share price is the dividend.
The higher the ratios, the better.
The five-year average dividend payout for ICICI Bank is higher at 11.7%,compared to 7.6% of Axis Bank.
In terms of dividend yield, ICICI Bank is leading with a five-year average of 0.4%, while Axis Bank has an average of 0.2%.
Return metrics
Two key return metrics for analysing a bank’s performance are return on equity (RoE) and return on assets (RoA).
Return on equity measures how much profit the bank can make on equity capital. On the other hand, return on assets measures how much profit the bank can earn on the assets, in this case, loans and advances.
Ideally, for banks, an RoA of 1% and above is considered good.
ICICI Bank is leading in terms of RoE with a five-year average of 7.9% when compared to 5.2% of Axis Bank. In terms of RoA, ICICI Bank is again ahead with a five-year average of 0.9% when compared to 0.4% of Axis Bank.
However, both banks have an RoA of less than 1%.
Valuations
To compare both banks in terms of their valuation, we can use the Price to earnings ratio (P/E) and Price to Book Value (P/BV).
Price to earnings ratio is a measure of how much an investor is willing to pay for one rupee of earnings.
In contrast, price to book value is a measure of how much an investor is willing to pay for one rupee of book value.
A high ratio indicates the shares are overvalued and are available at a premium, while a low ratio indicates they are available at a discount.
The five-year average P/E of ICICI Bank is 28.7, whereas for Axis Bank it is 88.7. In the financial year 2021, the P/E ratio of ICICI Bank and Axis Bank stood at 21.9 and 29.7 respectively.
In terms of P/E, Axis Bank has a higher value, indicating its shares are overvalued when compared to ICICI Bank.
However, currently, both the shares are trading lower than their five-year averages.
In terms of P/BV, ICICI Bank’s shares are available at a slight premium. The five-year average P/BV of ICICI Bank and Axis Bank are 2 and 2.1 respectively.
In the financial year 2021, the P/BV ratio of ICICI Bank is 2.6, and Axis Bank is 2.1.
Axis Bank’s shares are trading at the same level when compared to its five-year average. However, ICICI Bank’s shares are trading at a premium when compared to its five-year average.
Impact of Covid
Due to the pandemic, banks saw low demand for loans and fee-based services which directly affected their revenue.
However, the RBI intervened and ensured there was enough liquidity in the system by reducing interest rates, placing moratoriums on loans for specific borrower segments, and providing a resolution framework for stressed assets. This helped the banks and economy survive the lockdown.
Both Axis Bank and ICICI Bank have been investing in digital technologies and hence they could roll out digital solutions and enable work from home so they could give their customers uninterrupted service.
However, once the lockdown restrictions were eased, the demand for loans picked up and the banks could revive at a good pace, ending the year on a positive note.
Sustainability
The banking system has a major role to play in ensuring sustainability.
ICICI Bank is reducing its resource consumption and is increasing the use of renewable energy sources at its branches. It is also concentrating on waste management and water conversation.
Besides this, it is lending to environmentally-friendly sectors and financed solar, wind, and hydro projects across India.
Axis Bank on the other hand is reducing its carbon footprint by increasing its efficiency in resource consumption, adopting green principles at its branches and using cloud technology to centralize their system to reduce power consumption.
It also has a Sustainable Lending Policy and Procedures (SLPP) that integrates environmental and social risk assessment into its lending decisions.
Future Prospects
With an increase in the working population and rising disposable income, the demand for banking services will be high in India. This coupled with government initiatives such as financial inclusion will help in the growth of the banking sector.
Apart from this, with a surge of new fintech startups and the opening of new investment opportunities, the banking industry will see a surge in digital transactions.
However, banks should be more robust in leveraging technology to increase their digital business, which will not only help in acquiring new customers but also retain the existing ones.
Both ICICI Bank and Axis Bank at the forefront of leveraging technology. There are high chances that both banks will benefit from the growth of the entire industry.
Which is better?
ICICI Bank has higher deposit growth and higher net interest income growth than Axis Bank. It’s also leading in terms of profit margins, and dividend ratios.
Moreover, ICICI Bank is also efficiently using its capital and assets to generate returns.
However, Axis Bank is ahead of ICICI Bank in terms of growth in loan books and had slightly higher fee income and net interest margin indicating lower interest expense.
It also has lower NPA’s and a higher provision coverage indicating low credit risk.
Though it is trading at a higher P/E than ICICI Bank, in terms of P/BV its shares are available at a discount.
Though both the banks seem to have strong financials, it’s always better to check the fundamentals and valuations of the company before making an investment decision.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
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(This article is syndicated from Equitymaster.com)
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