PremiumMUMBAI: ICICI Bank Ltd has hit all the right notes with its performance for the March quarter. The highlight of the fourth quarter was the healthy operating metrics in both income and profit. Together with the management’s message, that exuded enough confidence for coming quarters, it should be no surprise that investors are elated.
Shares of the bank rose 5% in early deals on Monday. To be sure, analysts had pencilled in a smart recovery from the pandemic’s impact in FY21 which the lender seems to have delivered. ICICI Bank’s operating profit grew 15.5% on the back of a 16.8% growth in its core interest income for the fourth quarter.
Premium But what is working for ICICI Bank is not just better performance, but a performance that seems to come close to most valuable lender HDFC Bank. This single factor has meant that ICICI Bank is on the path to bridge the valuation gap with the latter. Analysts point out that both in terms deposits and loan growth, the lender has given tough competition to HDFC Bank Ltd.
"We are encouraged to see the bank report a healthy growth of 24% in average CASA balances (CASA ratio at 46%) and retail loan growth of 20% YoY. Interestingly, these compare well with HDFC Bank's 27% growth in CASA and 7% YoY in retail loans," wrote analysts at Jefferies India Pvt Ltd in a note.
Indeed, the overall loan growth of ICICI Bank at 14% is not just higher than the industry but also that of immediate peer HDFC Bank. That the loan growth was broad based with both retail and corporate loan books showing healthy expansion should also be appreciated. Sequentially, retail loans grew 6.6% while the corporate book showed a growth of 3.9%. The lender has also benefited from the troubles of its rival HDFC Bank on credit cards. In a call with analysts, the management said the bank has seen market share gains and sharp growth in this segment.
That said, one metric where ICICI Bank is yet to give complete confidence to investors is asset quality. For the fourth quarter, the lender reported an improvement in asset quality metrics. To be sure, it has one of the highest contingency provisions for the pandemic related risks in the industry. Overall provisioning coverage ratio is the highest in the industry. To that extent, analysts believe that incremental provisioning needs would be lower leading to a steady improvement in profitability. This is behind the re-rating of the stock recently and the upgrades in earnings per share by some brokerages. Those at Nomura expect credit costs to taper off from here on.
But what investors may also fret about is that the bank’s fastest growing loan segment was that of small and medium enterprises. These are most vulnerable during lockdowns, and the second wave has increased the instances of lockdowns in the country. What’s more is that retail stressed loans are still higher compared with pre-pandemic levels. ICICI Bank may deserve the boost to its valuations recently but the lender would have to navigate stress for these valuations to stick.
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