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Estimate RoA gap to sustain at 40-50bp; maintain preference for ICICIBC

* ICICIBC has outperformed AXSB in four out of the past five fiscals, while on a cumulative basis, ICICI Bank’s stock has outperformed AXSB by 143% over the past five years. We note that since our AXSB rating downgrade, ICICIBC has outperformed AXSB by ~11% in the past few months.

* We believe that owing to constraints on the CD ratio and challenges in garnering retail deposits, AXSB will continue to face pressure on its growth and margin profile, leading to a persistent RoA gap compared to ICICI Bank. In our estimates, we have already accounted for a growth differential of 200-300bp between the two banks.

* ICICI Bank’s M-cap in Mar’19 was ~30% higher vs. Axis Bank with an absolute gap of ~INR580b. Five years later, in Mar’24, ICICI Bank’s M-Cap is 136% higher vs. Axis Bank and absolute gap now stands at INR4.45t.

*  AXSB is currently trading at a 1.5x FY26E ABV and while overall valuations look reasonable, the pressure on key operating metrics will limit stock performance in the near term.

* We continue to prefer ICICIBC on its steady return ratios and its ability to deliver superior growth. We thus estimate ICICIBC to deliver FY26E RoA/RoE of 2.2%/17.8% vs. AXSB RoA/RoE of 1.7%/17.1%.

 ICICI has outperformed AXSB by 143% over the past five years; ~11% outperformance since our rating downgrade last quarter

* We had earlier pitched AXSB as a stock of the year during Jan’23 (Growth outlook gaining traction) and subsequent to the healthy outperformance (~18% returns during CY23), we downgraded AXSB stock in Jan’24 (Earnings in line; remain watchful on growth and NIMs) on concerns around growth, margins, and lower return ratios with RoA gap between AXSB and ICICIBC sustaining at 40-50bp. We thus note that since our AXSB rating downgrade, ICICIBC has outperformed AXSB by ~11% and while AXSB’s valuation multiple looks reasonable, the overhang on key operating metrics and weaker profitability will limit any meaningful stock return over the near term.

ICICI has outperformed AXSB in four out of past five fiscals

* ICICIBC’s market cap has registered a CAGR of 24% over FY19-24 vs. 10% witnessed by AXSB. This has been enabled by robust 65% earnings CAGR over FY19-24E vs. 39% CAGR for AXSB over a similar period. ICICIBC’s market cap over the past five years has thus grown at 198% vs 63% for AXSB. However, given multiple capital raises at AXSB vs. ICICI, we believe that comparison on stock returns is more appropriate where ICICIBC has outperformed AXSB by 143% during FY19-24 with the bank outperforming in four out of the past five years. We estimate ICICI bank to deliver 13% earnings CAGR over FY24-26E, resulting in RoA of ~2.2% over FY24-26E vs. estimated RoA of ~1.7% for AXSB over a similar period.

Elevated CD ratio of AXSB to constrain growth; estimate ICICIBC to maintain steady ~18% loan CAGR over FY24-26E

* ICICIBC has been delivering a steady loan CAGR of 18% over FY21-24E, while AXSB has reported a loan CAGR of 17% over a similar period. We note that ICICIBC is well positioned in terms of its liability profile with a healthy mix of CASA and retail deposits. Additionally, the domestic credit-deposit ratio for the bank also remains in control at ~85% vs ~93% for AXSB. We believe that this will significantly impede AXSB’s growth prospects. We have already factored in a growth differential of 200-300bp between the two banks.

AXSB’s margin profile to remain weak vs. ICICI Bank

* ICICIBC has consistently delivered superior NII growth vs. AXSB over the past three years, led by robust margins and healthy business growth. NIMs for ICICIBC has remained in the range of 4.4-4.5% vs ~4.0% for AXSB. Margin profile for AXSB has been weaker due to higher funding costs, presence of RIDF bonds, lower capitalization levels and relatively lower mix of Retail loans. During 3QFY24, both AXSB and ICICIBC reported 10bp QoQ decline in margins to 4.0%/4.4%, respectively, as AXSB’s Cost of funds has increased to 5.4% in 3QFY24 vs 5.0% for ICICIBC. We believe that owing to constraints on CD ratio and challenges in garnering retail deposits, the margin profile for AXSB will remain under pressure despite lower NIM base.

* High opex ratios for AXSB further remains a drag on profitability

* ICICIBC has been consistently strengthening its digital capabilities and has been gaining market share while effectively managing its cost-ratios. However, Opex for AXSB continues to remain elevated with C/I ratio sustaining at ~50%, while cost-assets ratio also increased to 2.5% in 3QFY24. With continued investments in branches and digital innovation, we expect AXSB’s cost-ratios to remain elevated, thus limiting any meaningful reduction in RoA gap vs that of ICICI Bank.

Asset quality robust; expect credit cost to sustain at similar levels for both

ICICIBC has made significant progress toward improving its asset quality, with the best in class PCR of ~81%, which coupled with contingent provisions of ~INR131b (1.1% of loans), will keep credit cost benign. Through aggressive investments in technology, ICICIBC has leveraged analytics and digital capabilities to formulate early delinquency models, aiding the bank in maintaining control over slippages. We thus expect NNPA to fall to 0.4% by FY26E- similar to AXSB, while credit costs are expected to sustain at ~50bp over FY26E vs ~60bp for AXSB.

Valuation and View

ICICIBC has been delivering industry leading RoA with the same being ~50bp higher than AXSB over the past few years. AXSB’s elevated CD ratio will constrain credit growth, while continued re-pricing of deposits will likely exert pressure on margins in the coming quarters as well. The capitalization level for ICICIBC remains strong with a Tier-I ratio of 16%, which will enable healthy growth trajectory, while healthy accretion of retail deposits will be a key growth enabler. We thus estimate ICICIBC’s loan book to register a CAGR of ~18% over FY24-26E vs. 16% for AXSB. Also, while ICICIBC is positioned well to benefit from operating leverage and grow the business on the back of strong technological investments, AXSB has been in an investment mode, which will thus keep the difference in cost-ratios of the two banks elevated. AXSB is currently trading at a 1.5x FY26E ABV and while the overall valuations look reasonable, the pressure on key operating metrics will limit stock performance in the near term and we continue to prefer ICICIBC on steady return ratios and ability to deliver superior growth. We thus estimate ICICIBC to deliver FY26E RoA/RoE of 2.2%/17.8% vs. AXSB RoA/RoE of 1.7%/17.1%.

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