Buoyant mgmt outlook, rising share of retail loans bode well for ICICI Bank

Q2 Net NPA at 1% is the best since FY16; margin for error on asset quality may be very limited

ICICI Bank’s management commentary following the September quarter (Q2) results carried 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 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 has helped renew investors’ optimism on the stock, with gains of over six per cent on Monday’s trade.

The conviction that Rs 8,770 crore (1.3 per cent of total book) already provided against Covid-led pain 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 the worst of asset quality woes behind the bank and point at the quality of book built in recent years.

Also, Rs 3,000 crore of provisioning cost plunged by 61 per cent sequentially, marking the sharpest fall largest among private banks. Even on a year-on-year basis, the 13 per cent rise in provisions is the lowest among peers. But how sustainable are these numbers?

While the net NPA ratio cooled off to a per cent, gross NPA ratio came at 5.17 per cent. Without the 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, the reduction in bad loan ratios may not have been very significant. 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), auto, builder portfolio, ‘Kisan’ credit cards and unsecured retail segment,” the analysts note.
 

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 has also eased. Yet analysts at MOSL don’t rule out an increase in low-rated book. Credit cost may therefore remain elevated 2.8 per cent for FY21.

“Any lumpy unforeseen slippages will be detrimental. At current level ICICI Bank stock is priced to perfection and the room to falter on asset quality is very limited,” said an analyst with a foreign brokerage.

Rising share of retail loans is another noteworthy aspect given that increase is coming at a time when its larger peers are seeing the retail share reduce or stagnate. 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.
 

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 ease, 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 the best case scenario for FY21.

Nonetheless, analysts at Goldman Sachs note that ICICI Bank is better placed compared to peers to lead the recovery while those at JP Morgan feel the bank is well-positioned to increase its market share given the strong capital, funding and technology position. At 2x FY22 estimated book, the stock’s valuation has appreciated by over 40 per cent year-to-date and post Q2’s earnings upgrade, the rerating may continue.