Post the lifting of the ban on NPA recognition by the Supreme Court, all eyes were on the March quarter numbers of banks. The bad loans were expected either to surge significantly or be camouflaged by a spike in restructured loans. But the three top-tier private banks that reported their March quarter results exhibited no such deterioration in asset quality. HDFC Bank, ICICI Bank and Axis Bank have beat the industry in terms of the growth in their overall loans. Here, we discuss their March quarter performance and assess how these banks fared.
Loan growth
While overall bank credit grew by 5.6 per cent only in FY21, HDFCB, and ICICI demonstrated double digit growth. Axis reported a growth of 12 per cent yoy too including its TLTRO investments. TLTRO (targeted long-term repo operation) is a liquidity window offered by RBI that mandated investments in NCDs and commercial papers of corporates in certain specific sectors. But for these investments, the loan portfolio of the bank was up 9 per cent y-o-y in FY21 to ₹6,23,720 crore.
While HDFCB resorted to corporate loans (up 21.7 per cent y-o-y), others banked heavily on their retail portfolios. Much of the credit growth for ICICI and Axis came from retail loans, up 19.9 and 10 per cent (y-o-y), respectively. Retail loans hold a lion’s share in the domestic loan portfolios of both ICICI and Axis—70 and 54 per cent, respectively, while for HDFCB retail book constitutes 47 per cent of their book.
At this point in time, while retail credit offers granularity and better hold on yields, any systemic shock in the asset quality front, owing to the ongoing pandemic, may affect the earnings from the portfolio going ahead. The risk mostly lies in the unsecured portion of the retail credit, that is personal loans and credit cards. Such loans constitute 16 per cent of HDFCB’s loan book, and 9 per cent of ICICI and Axis’s portfolio.
Deposits
Among the three, Axis also demonstrated the lowest growth in the overall deposits — up 10 per cent y-o-y while ICICI and HDFCB reported a 21 per cent and 16.3 per cent rise in their deposits (y-o-y). Besides, much of the growth for the private players came from CASA (current account/savings account). HDFCB, ICICI and Axis saw a 27 per cent, 24.1 per cent and 17 per cent growth in their CASA deposits , respectively. This helped them cushion the impact of falling yields (interest rates). While lower interest rates in the economy bolsters credit growth, banks also witness margin pressure.
Margins
Having said that, the three private banks discussed here contained the impact of falling yields well in FY21. While HDFCB saw a 10 basis points (bps) drop in its net interest margins (NIMs) — owing to increasing competition in the corporate loan segment — ICICI’s NIMs only dropped by 4 bps y-o-y to 3.69 per cent. Axis emerged an outlier here, with its NIMs expanding by 10 bps y-o-y to 3.53 per cent. However, this increase is largely owing to an unfavorable base -- NPAs spiked last year resulting in a drop in yields in FY20 (interest reversals).
Quality and valuation
All three banks also contained their slippages in the March quarter. They had well estimated proforma NPA numbers and created sufficient provisions at the onset of the pandemic. While the GNPA ratio of ICICI and Axis continues to remain at the higher end, they have been improving over the last couple of quarters. From the proforma GNPA numbers in December 2020 quarter, the GNPAs for ICICI and Axis are down by 46 and 85 bps, respectively, in March 2021 quarter.
GNPAs of the banks are now at 4.96 and 3.7 per cent, respectively, some of which are legacy issues in the corporate book. That apart, the provision coverage ratio is at 77.7 per cent (excluding covid provisions) and 120 per cent, respectively.
Owing to improving metrics on asset quality and aggressive growth numbers, investors seem to have stocked up on ICICI Bank, post results — now trading at a price to book of 2.78 times —23 per cent higher than its three-year average ratio. Axis now trades at 2.13 times –– almost in line with its three-year average. With best in class metrics, HDFCB continues to be our preferred pick within the three. Besides, owing to near-stable metrics it continues to trade at premium valuations (over peers) of 3.87 times FY21 book value. Investors can accumulate the stock of HDFCB in further dips. ICICI Bank could see a re-rating in earnings, if legacy issues in corporate book continue to fade in coming quarters. It can be the next preferred pick (Accumulate) in the space.