Morgan Stanley prefers Axis Bank over ICICI on asset quality guidance and progression. It expects Axis' market share gain to be strong, which should boost stock performance once legacy non-performing loans (NPLs) are accounted for.
The brokerage firm says PSU banks should remain structurally challenged given high NPL formation, weak coverage, very low pre-provision operating profit (PPoP) buffers and low capital while private banks should keep gaining share in profitable areas. However, according to Morgan Stanley’s estimates, Axis may earn 400-500 basis points (bps) higher return on equity than ICICI and hence prefers Axis structurally. “Given the stocks' strong performances over the last 6 months, if asset quality progression is weak then stocks could be weak - but we would buy Axis Bank on any such weakness as the longer-term thesis of market share gain remains intact,” it says in a report. It has raised provisions for ICICI in FY17 to 325 basis points of loans (from 185 earlier) to reflect higher NPLs and some increase in coverage. It has increased credit costs for Axis Bank in FY17 and FY18 to 210 bps and 150 bps, respectively (from 180 bps and 125 bps), which drives down earnings for the next two years, taking down ROE by 100 basis points.
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