Which one is the best pick in the banking sector? Decide after going through comparative analysis here

This year banking sector has suffered unusually high volatility as a result of global challenges hurting the world economy. The pressures of a global recession are mounting on both developed as well as emerging economies, and central banks are regularly hiking interest rates to take control of the situation. Even the US Fed, a global powerhouse whose judgments are felt in every nook and cranny of the world’s economies, has been observed struggling with inflation. Further, the Fed’s recent rate hike, the third in a row this year, has put pressure on global markets and currencies.

Therefore, one of the sectors that has attracted attention during this period of extraordinary volatility and whipsaw-filled year is the banking industry. Numerous brokerage firms and investment consultants are frequently seen advising and recommending various banks based on their personal preferences. This includes HDFC Bank, ICICI Bank, IndusInd Bank, and Axis Bank. They are all well-known listed banks with a strong presence in the Indian banking industry. Given their potential and future growth possibilities, one may wonder which one is the best investment over the long term. However, let’s first take a look at the YTD and past one-year returns that these banks have delivered, before discussing any further.

By looking at the graph, it is clear that ICICI Bank and IndusInd Bank have both given highly robust returns, while Axis Bank has still delivered acceptable returns, HDFC Bank has failed to deliver even a single digit positive return. This clarifies why ICICI and IndusInd Bank garnered praise while HDFC Bank is gaining traction due to its availability at a higher discount. But, before we draw any conclusion, let’s look at their fundamentals over the last three years and see if they were able to rebound to pre-covid levels and carries any potential for more gains.

Net Interest Income consistently growing for past 3 years

The graph below shows how each bank’s net interest income has steadily increased over the past three years. The fastest-growing banks are HDFC and ICICI, followed by Axis and IndusInd Bank. By raising its NII at a CAGR of 19.4% over the last three years, ICICI Bank was able to boost it by over 42.6%. While HDFC Bank’s NII increased by 28% between FY20 and FY22, representing a 13.2% three-year CAGR growth.

Moving on to Axis Bank and IndusInd Bank, they experienced NII CAGR increase of about 14.6% & 11.5%, respectively, during the course of the last three years, translating to NII growth of 31.44% & 24.3%. Additionally, it should be emphasized that among the banks included in this analysis, HDFC Bank reported the highest NII, followed by ICICI Bank and Axis Bank.

This healthy and robust growth in the Net Interest Income which is also the primary source of Income for banks, also boosted the PAT of the companies. The graph below is an indicator of the same.

PAT: ICICI enhanced their PAT by 3X while IndusInd Bank has just managed to reach pre-covid

According to the graph below, it can be seen that all the banks have improved their profitability over the last 3 years. ICICI Bank is in the lead by increasing its profits from Rs 7,931 crores in FY20 to Rs 23,339, almost an increase of more than 300%. While Axis Bank also at the first glance appears to have increased its profits by multi-fold, but the reality is that profits that were reported in FY20 were much lower than past 3-year average. So, considering it to be an extra-ordinary year, it can be stated that, in real terms it managed to increase its profits by 3X rather than 1000%.

Even the HDFC bank has increased its profitability by almost 41% in past years, which translates into 3-year CAGR growth of 18.6% and the same is projected for future as well. Lastly, IndusInd Bank which saw a flat growth in its profits in 3 years, can be taken as to reach pre-covid level. The bank saw its profits declining from FY20 to FY21, but then it again rebounded back to the same level. Now, it is projected by the market analysts that IndusInd Bank will probably continue growing its business as well profitability going forward.

Asset Quality: IndusInd Bank has best asset quality while HDFC Bank is last in the race

Asset Quality which is a measure of bad loans & includes GNPAs and NNPAs is one of the most important measures while analysing the banks. Banks with lower or declining GNPAs are considered better and well placed in the market and considered to have better asset quality than others with higher GNPAs.

With this it can be clearly seen that both ICICI & Axis Bank managed to improve their GNPAs consistently. While the one which is better placed is the Axis Bank will GNPAs at 3.0% as compared to ICICI Bank with GNPAs of 3.8%.

Whereas, if we check IndusInd bank it can be said that bank hasn’t experienced much improvement in its GNPAs but still is much more suited than its peer as its GNPAs is already very low, i.e., below 3%. Lastly, coming onto the HDFC Bank which has seen its asset quality decreasing, saw its GNPAs which were stable at 3.9% for two years reaching 5%, highest among the banks undertaken for analysis.

Therefore, if things go with the same pace, investors can expect ICICI Bank & Axis Bank to improve their asset even further in coming years, while for HDFC Bank, prospects appear to be mixed.

Technical view & analyst’s viewpoint:

“Banking equities have seen a major boost in investor interest due to improved fundamentals, bright growth outlook, healthy balance sheets, and sanguine asset quality expectations. We predict that the Indian economy would see an upcycle in the coming years, resulting in large credit uptake. Furthermore, FII and FPI purchases have been icing on the cake. ICICI Bank, HDFC Bank, SBI, and Federal Bank are our top recommendations in the sector.” said Punit Patni, Equity Research Analyst at Swastika Investmart Ltd.

According to BNP Paribas, “we remain selective with OVERWEIGHT (OW) on the banking sector, given that it is trading below its 10-year mean NTM (next 12 months) PE, with better credit growth and stronger and cleaner balance sheets.” BNP Paribas’ top picks in this category continue to be Axis Bank and HDFC Bank.

So, with coming onto technical side, ICICI Bank & IndusInd can be seen in a bull rally. Both ICICI Bank & IndusInd Bank started it after breaking from the narrow consolidation of 7-8 months. While Axis Bank still appears to be consolidating in sideways trend, HDFC Bank is in a short-term downtrend. Therefore, before taking any position, its better to wait for the stock to turn technically bullish or accumulating it in dips with long term view.

Our View:

Since ICICI Bank has access to high-quality, fine-grained low-cost deposits, it has been able to keep its cost-of-funds edge over its competitors, better enabling it to compete in rate-sensitive lending segments. Furthermore, 70% of all loans are floating rate loans, which will benefit from RBI’s rate increases. Deposits are being re-priced more slowly than loans. Also, deposit holders typically do not receive the full advantage of the rate increase. The rate increases will therefore continue to support margin throughout FY23. This is the reason why ICICI Bank is ranked as the top bank for long-term investment.

In contrast, investors should expect HDFC Bank to perform progressively as revenue and margin improve during FY23 and as details about a number of merger-related issues become clearer. Additionally, the bank can secure a position in preferred banking stocks if it reports an improvement in asset quality. While as per trendlyne, HDFC Bank has highest upside potential in terms of buy recommendations, but one other side not looked at is the fact that stock has only delivered negative returns in 2022, giving all the more reason to have at least higher upside potential than peers.

In contrast, Axis Bank’s asset quality is continuing to rise thanks to solid recoveries and upgrades as well as a moderated slippage rate. As a result, investors should pay close attention to any sustained increases in credit costs, while margin and cost ratio improvements will also be important to note.

Finally, IndusInd Bank is preparing to deliver sustainable growth, supported by ongoing market share gains in its key industries and the expansion of new business verticals. Although slippages are beginning to put pressure on asset quality, management anticipates that it will eventually ease. Furthermore, IndusInd Bank, which currently leads in terms of returns delivered, is likely to keep up this pace as its PAT is anticipated to expand at a CAGR of 39% during FY23–24, further strengthening its key ratios. Therefore, IndusInd bank can also be viewed as a bullish long-term bet, outperforming its competitors by adhering to the fundamentals and growth drivers that make up its business model.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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