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ICICI Bank’s management commentary post September quarter (Q2)
results was charecterised by a tone of optimism. Whether the confidence came from the bank’s better than expected collection trends or from an increasing pie of retail loans which further strengthened to 66 per cent, up 400 basis points (bps) year-on-year or net non-performing assets (NPA) ratio cooling off to a 5-year best at 1 per cent, it should help investors renew their optimism on the bank stock. The conviction that Rs 8,770 crore (1.3 per cent of total book) already provided against Covid-led asset quality disruptions is adequate and more provisioning may not be needed and that based on initial assessment, just about a per cent of its loan book could be restructured, indicate that not only is the worst of asset quality woes behind the bank, but also that the recently built book is of quality.
Another interesting aspect is Q2’s provisioning cost at Rs 3,000 crore. The 61 per cent sequential fall in provisioning cost the largest among top private banks, and even on a year-on-year basis, the 13 per cent rise in amount set aside for bad loans is the lowest among peers. But how sustainable are these numbers?
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While net NPA ratio cooled off to a per cent, gross NPA ratio came at 5.17 per cent. Without Supreme Court’s standstill order on NPA recognition, these numbers would have been 1.12 per cent and 5.36 per cent respectively. While still better than Q1 level, the reduction in bad loan ratios may not have been very significant. Also, the bank expects normalisation of credit cost only in FY22. Hence from the current levels, further strengthening of asset quality may be more gradual and slower. Analysts at Motital Oswal Financial Services (MOSL) have maintained FY21 net NPA ratio at 1.6 per cent as against 1.4 in FY20. “We expect a potential increase in delinquencies in small and medium enterprise (SME) /business loans, auto, builder portfolio, ‘Kisan’ credit cards, the unsecured retail segment,” the analysts note.
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Likewise, the share of low rated (BB and below) loan book also reduced from Rs 17,110 crore in Q1 to Rs 16,170 crore in Q2 (2.5 per cent of overall book). The overall stress pool, in absolute and relative terms, has also eased. Yet, under the current circumstances, analysts at MOSL don’t rule out an increase in BB and below pool. Credit cost may therefore, remain elevated 2.8 per cent for FY21.
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“Any lumpy unforeseen slippages will be detrimental and at current level as
ICICI Bank stock is priced to perfection, there is limited room to falter on asset quality,” said an analyst with a foreign brokerage.
Rising share of retail loans is another noteworthy aspect given that increase is coming when its larger peers are witnessing the retail proportion either stagnate or reduce. Over half of ICICI Bank’s book is cushioned by home loans, where disbursements were at pre-Covid level in Q2. Same was with auto and rural loans. Analysts at Edelweiss expect these categories to be ICICI Bank’s growth drivers.
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What could be a dampener is the excess liquidity carried by the bank. At 20 per cent year-on-year deposit growth in Q2, it outpaced the loan growth. Therefore, even if the cost of deposit at 4.22 per cent (down 31 bps sequentially) continues to be on a declining mode, stronger deposit accretion will keep a tab on the profitability. At 3.57 per cent net interest margin (NIM or profitability), the number fell by 12 bps sequentially. How soon the bank can arrest this pressure is a function of loan growth. For now, analysts feel 8 – 9 per cent loan growth is best case scenario for FY21.
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Barring this, analysts say
ICICI Bank stock is well-positioned to stay on its rerating course. At 2x FY22 estimated book, the stock’s valuations have already appreciated by over 40 per cent year-to-date.
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