Axis Bank vs ICICI Bank: Which is the best Indian banking stock?

Banks wield immense power in the financial world, acting as modern-day gladiators in an arena where loans and deposits shape economies and personal lives. Gone are the days of dusty ledgers and long lines at teller windows. Today, the Indian banking industry is driven by innovation, adapting to serve a rapidly evolving population.

In this dynamic landscape, two giants, ICICI Bank and Axis Bank, are vying for dominance. Both boast impressive track records, vast branch networks, and a commitment to innovation. Let's delve into which bank has the potential to rise to the top.

Business Overview

Axis Bank

Founded in 1993, Axis Bank is a leading private bank in India with an extensive branch network. It offers a wide range of financial services, including retail, corporate, wholesale, and investment banking. Axis Bank has a significant market share in banking, credit cards, and personal loans. Recently, it expanded its reach by acquiring Citibank India's retail banking business.

ICICI Bank

ICICI Bank is the second-largest private sector bank in India, offering a diversified portfolio of financial products and services to retail, corporate, and small and medium-sized businesses. It operates through its subsidiaries, providing banking, life and general insurance, housing finance, investment banking, and brokerage services. ICICI Bank also has an international presence with branches and representative offices across the globe.

In terms of market capitalisation, ICICI Bank leads with ₹7,877.8 billion as of 15 May 2024, compared to Axis Bank's ₹3,465.9 billion. ICICI Bank also has a larger branch network, with 6,523 branches and 17,190 ATMs across India, while Axis Bank has 5,377 branches and 16,026 ATMs. ICICI Bank serves over 28 million customers, surpassing Axis Bank's 20 million.

If we compare the two banks based on performance on the stock market, Axis Bank is leading with 22.9% gains, whereas ICICI Bank shares gave 18.8% return in the last one year.

Net Interest Income (NII)

For a bank, interest serves as both a major source of income and expense. The bank earns interest on loans and advances while paying interest on deposits. The difference between these two amounts is the net interest income (NII), which is a primary revenue source for the bank.

The net interest margin, which is the ratio of net interest income to average loans and advances, indicates how effectively the bank generates interest income from its loans. A higher net interest margin is generally considered beneficial.

Over the past five years, Axis Bank and ICICI Bank have seen their interest incomes grow at a compound annual growth rate (CAGR) of 9.3% and 11%, respectively, primarily due to significant growth in their loan books. During the same period, their interest expenses have grown moderately.

The net interest income for Axis Bank and ICICI Bank has increased at a CAGR of 14.7% and 16.5%, respectively, with an average net margin of 3.5% over the last five years.

ICICI Bank leads in terms of interest income, net interest income, and net interest margin, largely due to the robust growth of its loan book. On the other hand, Axis Bank's net interest income has primarily grown due to improved asset quality and expanded interest spreads.

Profitability

Profitability can be assessed through net profit growth and net profit margin expansion. Over the past five years, ICICI Bank's net profit grew at a CAGR of 51.6%, driven by loan book growth, electronic toll collection, and digital transactions. Axis Bank's net profit grew at a CAGR of 16.5%, primarily due to high growth in interest income.

Deposits

The amount of money deposited reflects customer confidence. A larger deposit base suggests stronger trust from customers and a more solid reputation for the bank.

The deposits of ICICI Bank are 1.3 times higher than Axis Bank. Despite having very high deposits, ICICI Bank has managed to grow its deposits at a CAGR of 12.2% in the last five years.

The bank has expanded its branch network over the last five years, which aided the deposit growth.

Axis Bank's deposits grew at a CAGR of 11.4%, which was primarily driven by branch expansion and digitalisation. With the Citibank acquisition, the deposits are expected to go up further.

Advances

Axis Bank leads in loan growth with an 11.4% CAGR over the last five years, slightly ahead of ICICI Bank's 10.9%. Axis Bank also has a higher advances-to-deposit ratio.

Net NPA

A bank marks an asset as a non performing asset (NPA) if it isn’t earning interest for more than 90 days. A rising NPA can be a cause of concern as it affects the bank's profitability.

To gauge the level of NPAs in 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 average net NPA for ICICI Bank and Axis Bank is 1.3% and 1.2% respectively. According to the Reserve Bank of India (RBI) the net NPAs should be lower than 6%.

Both ICICI Bank and Axis Bank have done better than the standard set by RBI. Moreover, the NPAs are falling in the last five years which is good. It indicates the banks are following a stringent due diligence process before giving loans.

Financial Efficiency

Financial efficiency is measured by the capital adequacy ratio and return on equity (RoE). Both banks have strong capital adequacy ratios, with ICICI Bank at 17.9% and Axis Bank at 17%. ICICI Bank leads in RoE, averaging 10.6% compared to Axis Bank's 7.4%.

Dividend

ICICI Bank has a higher dividend growth rate with a CAGR of 53.9%, compared to Axis Bank's 3.8%. ICICI Bank's dividend yield and payout ratios are also higher, averaging 0.5% and 10.6%, respectively.

Valuations

Valuation ratios, including price-to-earnings (PE) and price-to-book (PB) ratios, indicate whether a company is undervalued or overvalued. Axis Bank is undervalued compared to ICICI Bank based on these metrics.

Which Bank Stock is Better: Axis Bank or ICICI Bank?

ICICI Bank excels in interest income, net interest income growth, profitability, deposit growth, financial efficiency, and dividend payment. However, Axis Bank leads in loan growth, advances-to-deposit ratio, and net NPA. 

Axis Bank's acquisition of Citibank's retail business is expected to enhance its customer base and deposit base, while ICICI Bank focuses on expanding its digital business and retail loans.

Both banks are well-positioned to benefit from India's growing infrastructure, business, and urbanisation. However, the highly regulated nature of the banking industry poses a constant risk of regulatory restrictions.

In conclusion, while both banks have their strengths, ICICI Bank currently has an edge in overall performance and financial metrics.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com