We got few emails in regards to what we think about ICICI bank and which one should we pick if we want to invest in the banking sector from these two.

Both the bank operate in the private sector and if we look at the balance sheet then ICICI bank is almost double the size of Axis bank but when it comes to the profitability Axis banks performance is better.

We always advocate to invest in the quality stocks when they are trading at cheap price, and today these two are trading at very expensive price, very close to our selling price.

We also rate ICICI bank as ‘B3’ and Axis bank as ‘B1’ for their quality and performance.

Let us focus on ICICI bank as we had already shared our views on Axis bank in various articles (click here and here to learn more about Axis bank).

ICICI banks quality and performance rating for 2015 was ‘B2’ and has dropped down to ‘B3’ this year mainly because of its bad performance assessed by ROE (return on equity). Because of its vast network they manage to source cheaper fund for their banking business compare to Axis Bank but the margins that Axis Bank makes on its Advances is far better than ICICI Bank.

The other factor that is hurting its ROE is its cost to income ratio. After paying interest on deposits, 60% of the remaining income is spent on operating expenses by ICICI bank and this is very high compare to banking standards (cost to income ratio should not exceed more than 40%). Axis banks cost to income ratio stands at 39%.

With the provisions of loan losses, Axis bank provisions it by 1.7% by average and ICICI bank by 1.4% of its loan book. With what is happening in the banking sector and looking at the large loan book of ICICI bank compare to Axis bank, we are of the opinion that they are not provisioning enough and thus it is more vulnerable to ‘Black Swan event’ in any quarter. Well, this is true for any bank in India at the moment as we don’t know how many snakes are hiding in the closet until they come up front.

In regards to valuations, we value ICICI banks intrinsic value for the 2016 to be Rs 125 per share. It is trading at twice to our calculated 2016 valuation, good time to sell in our opinion if you are holding it from long time. One of the reasons we sell stock is when its prices go far beyond to its expected future intrinsic value.

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 advise you to take professional advice before going ahead with our views.