We are talking about 3 private sector banks which in total have market cap of Rs 588,985 crore (87.90 billion US$). They pretty much represent close to 15% of Indian banking sector. All the three banks came out with their results yesterday where, Axis Bank disappointed with its performance so far in this financial year, HDFC Bank had satisfactory results and Kotak Mahindra bank beat the estimates of analyst. Media reported their results as a mix bag.

We always analyse any banking business on five important parameters to judge the business condition. Below is the summary of all the three banks business condition after looking at q2 – 2017 results.

Parameters Axis Bank HDFC Bank Kotak Mahindra Bank
Loan Book Growth 18.49% (Yearly) 18.13% (Yearly) 14.41% (Yearly)
Net Interest margin 4.75% (Yearly) 5.33% (Yearly) 7.54% (Yearly)
Non-interest income 21.62% 13.84% 66.24%
Cost growth 9.19% 18.62%
Asset Quality Net NPA’s – 2.02% Net NPA’s – 0.30% Net NPA’s – 1.05%


Let us look at half yearly results of these banks:

  Axis Bank HDFC Bank Kotak Mahindra Bank
Revenues 27,550.95 39,293.52 16,281.83
% 100% 100% 100%
EBT 2,829.64 10,228.02 3,404.48
% 10.27% 26.03% 20.91%
Net Profits 1,874.61 6,694.24 2,269.50
% 6.80% 17.04% 13.94%


There are lot of numbers that we will have to digest from both the above tables. Let’s start with Axis Bank, loan book is growing by 18.49% which is healthy and it is growing fastest compare to other two banks. However, asset quality is worst compare to HDFC Bank & Kotak Mahindra Bank. Is that loan growth justifiable looking at asset quality? You will get the answer to that question if you study its presentation on asset quality closely. We cannot calculate its cost growth, as so far we haven’t seen any growth in its earnings for this financial year.

HDFC BankHDFC Bank looks reported solid numbers, loan growth is seen of about 18.13% with least deterioration in its asset quality. The net NPA’s sit around 0.30% of its advances. So far every Rs 100 reinvested in this bank had fetched extra profits of Rs 9.19 (cost Growth) this financial year. Not so impressive that we would expect from such strong brand in the banking sector.

Kotak Mahindra banks loan book is growing by 14.41% with net NPA’s of the bank sitting at 1.05% of total advances. Almost half of its profits are generated from non-interest income, and this is growing strongly for Kotak Mahindra Bank by 66.24% compare to last year. For every Rs 100 reinvested in this business is generating extra profits of Rs 18.62% (cost growth) which tells you that there is still lot of growth opportunities with this banks business model.

It is hard to compare profit margins for these three banks. For Axis Bank this half yearly results are not normal due to slippages and deteriorating asset quality which is in the process of repair. HDFC Bank business model is different to Kotak Mahindra bank, as we can see from the above table that HDFC Bank is more profitable because three quarters of its earnings come from loan assets, whereas only half for Kotak Mahindra Bank.

So what were analysts’ expectations from all the three banks?

These expectations do not reflect the new information that was released yesterday. We will see changes in the earnings expectations as they update their earnings forecast for these three banks.

Axis Bank, analysts are expecting its 2017 earnings in range of Rs 6,703 crore – Rs 9,540 crore. We do not think its profits will be in those range or will be close to its lower end of expectations. If we assume those forecast real then its 2017 intrinsic valuation spectrum comes in range of Rs 210 – Rs 414 per share. These same analysts are expecting its earnings to grow by 24% in 2018, if that is real then its share price is trading in its 2018 valuation spectrum.

Analysts for HDFC Bank are expecting its earnings for 2017 in range of Rs 13,094 crore – Rs 15,461 crore. It looks they will report their profits in those range, and its valuation spectrum as per our calculations comes in range of Rs 509 – Rs 703 per share. Analysts are also expecting its earnings to grow by 23% in 2018. If they still manage to grow by those numbers, its share price is still trading outside its 2018 valuation spectrum, means they are expensive.

kotak-logoKotak Mahindra Bank, analysts are expecting its 2017 profits in range of Rs 2,872 crore – Rs 5,046 crore. It looks they will be able to manage on the upper band of this spectrum. We calculated its intrinsic value spectrum for 2017 to be Rs 68 – Rs 217 per share. These same analysts are expecting its earnings to grow by 29% in 2018, when we calculate its 2018 intrinsic value spectrum, we found its share price is trading outside spectrum, means they are expensive today.

So we conclude that one bank is in repair status, one is struggling to grow and the last one is expensive to buy. What do you think?

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we tell you to take professional advice before going ahead with our views.