While fears of low interest rates having dented margins and rising asset quality woes due to the pandemic grappled the banking stocks recently, private sector banks seem to have steered clear of such tremors.

Here, we discuss their December 2021 quarter performance and assess how these banks fared.

Loan growth

While overall bank credit grew by a tepid 6.7 per cent in December 2021, all four private—HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank (Kotak) lenders demonstrated double digit growth – in the range of 16-18 per cent y-o-y.

Much of the growth came from retail loans that now constitute 40-60 per cent of portfolios for these large private banks. Within them home loans and LAP were the major contributors-- Kotak saw a 38 per cent (y-o-y) spike in this segment. The other banks saw their mortgages inch up by 17-23 per cent y-o-y, in the recent December quarter.

While growth in retail credit promises granularity, the pandemic and the ensuing sporadic lockdowns may lead to systemic shocks in the asset quality front. Higher growth in unsecured portion of retail loans – Personal loans and credit cards, warrants more caution. While such loans constitute 15-16 per cent of the portfolio for HDFC Bank, ICICI Bank and Axis Bank, it merely constitutes 5 per cent in Kotak’s books.

Per the RBI’s recent Financial Stability report, such systemic shocks are plausible in the Small Medium Enterprises (SME) and microfinance portfolios of banks. While the large private banks have limited exposure to micro finance, loans to SMEs comprise 7 and 10 per cent of loans in the case of Kotak and Axis, respectively. Besides, the banks saw a near 21 per cent (y-o-y) growth in their SME portfolios in the December 2021 quarter. While ICICI too witnessed a 34 per cent jump in the SME loan portfolio, it merely comprises 4 per cent of its overall loan book. HDFC Bank’s commercial and rural banking segment (30 per cent of loans) —excluding agricultural loans, too spiked by 30 per cent in the quarter gone by.

Resurgence of corporate credit was also witnessed in ICICI (23.4 per cent of overall loans) and Axis (35 per cent) – whose corporate loans inched up by 12.5 and 13 per cent respectively. The other two banks whose corporate loans comprise 25 per cent of overall loan book, also saw a 7-8 per cent rise in such loans.


Despite such prominent growth in credit offtake, banks had to bear the brunt of falling yields, given the low interest rates in the market. However, private banks were able to cushion the impact through a healthy traction in deposit mobilization. While Axis stood out with a 20 per cent growth, the deposits of the other three private banks were up 14 to 16 per cent y-o-y. Besides, the growth in deposits were largely led by low-cost CASA (current account/savings account) deposits, that makes up for 44-47 per cent of their overall deposits. Kotak’s CASA ratio is however higher at 60 per cent, and these grew by 17 per cent (y-o-y) in the December quarter.


Owing to the healthy CASA mobilization, the net interest margins (NIMs) of ICICI Bank and Kotak were up 29 and 26 basis points (bps) y-o-y, respectively. While Kotak and HDFC Bank were long known for their superior NIMs (4.6 and 4 per cent respectively), ICICI too joined the league with 3.96 per cent NIMs.

While Axis Bank’s NIMs were down 6 bps y-o-y to 3.53 per cent, its spike since September 2021 quarter – up 14 bps is no mean feat. This is because Axis had been grappling with margins lower than peers, owing to heightened interest reversals (due to slippages) and weak loan spreads (due to portfolios shifts in a bid to clean up balance sheet). However, the December 2021 quarter saw some signs of improvements on both the asset quality front and in loan spreads.

Asset quality and valuations

The banks also contained their slippages well in the December quarter. Both ICICI and Axis saw their legacy issues waning, with over a 100bps drop (y-o-y) in their Gross Non-performing assets (GNPAs). Though the restructuring 2.0 was extended until end of December, the drop in GNPAs came from healthy recoveries and write-offs only. For instance, restructured loans comprise just about 0.63 per cent of overall loans in the case of Axis Bank.

While Kotak’s GNPAs were down 56 bps, HDFC Bank too saw a 12bps drop (y-o-y) -- despite having the lowest GNPA of 1.3 per cent.

With the highest margins and lower exposure to high-risk segments, the stock of Kotak Mahindra Bank continues to trade at 5 times its price to book, while HDFC bank with a tad lower set of margins and a much bigger balance sheet size trades at 3.7 times. While these banks continue to be our preferred picks, their current valuations are 7-9 per cent higher than their three -year average multiples and hence lower the risk reward for fresh investors.

In our previous round up on large private banks (in May 2021), we had indicated that ICICI Bank could see a re-rating in earnings, if legacy issues in corporate book continue to fade in coming quarters --- while recommending an accumulate on the stock. With the bank’s improving metrics, it now trades at 3 times its price to book—27 per cent premium to its 3-year average multiple.

Axis too has demonstrated improvements in operating metrics which was a long-drawn overhang on the stock. It now trades at 2.1 times its price to book, just 3 per cent higher than its three-year average valuations. We re-iterate our hold call on the stock, until the metrics improve further in the coming quarters.