ICICI Bank stock a good bet, but look out for retail non-performing assets

With the Street getting a tad cautious on HDFC Bank and SBI, market interest is moving towards ICICI Bank

ICICI Bank has benefited from the challenges facing peers in the sector. In the June quarter, when the private lender demonstrated its ability to correct its asset quality issues sharply, it regained investors’ trust significantly.

Brokerages including Morgan Stanley and Nomura have increased their allocation to the ICICI Bank stock in recent weeks, as competitors face issues such as possible slowdown in retail loans and elevated provisioning costs.

The underperformance by the Axis Bank stock lately, too, has helped ICICI Bank level valuations against the former, after nearly four years. Factors such as lower toxic assets, a good mix of retail and corporate loans, comfortable levels of unsecured retail portfolio, and a favourable deposit base have added to the strong sentiment for ICICI Bank. 

The share of retail loans in overall book has increased from 42 per cent to 61 per cent, in June quarter (Q1), after four years. It surpasses HDFC Bank, known to be the market leader in retail loans. Further, the proportion of unsecured retail loans was contained at 13.3 per cent of total retail loans (though it doubled from 6.6 per cent in FY15), provides comfort at a time when delinquencies in retail loans are slowly inching up. 
 

“The bank is comfortable with the growth in unsecured lending portfolio, given its under-penetration among existing clients (at 8 per cent of loans) and stable quality trends,” say analysts at CLSA.

Yet, one should keep an eye out on these numbers, as gross non-performing assets (NPA) ratio for retail loans rose to 1.9 per cent in Q1, marking a jump of 12 bps year-on-year. In FY15, the corresponding number was 2.02 per cent.

However, ICICI Bank trumps its rivals, which have unsecured loans upwards of 15 per cent.

In addition, amid debates over the impact of linking loans to external benchmarks on profitability, ICICI Bank’s share of low cost current account- savings account (CASA) deposits — at 45 per cent in Q1 (50 per cent a year-ago) — could help mitigate margin compression. 

Higher share of non-CASA deposits may limit ability of banks to reduce deposit rates in a declining rate trajectory. In Q1, the bank fared better than peers on this parameter, too.

Yet, it won’t be fair to assume all is fine. Share of loans to relatively weaker corporates (rated below 'A') account for 29 per cent of total book and has increased from 28 per cent in FY19. 
 

With fresh trouble brewing by the day, investors need to be watchful. A further increase in retail NPA ratio may test investors’ faith on the stock. “ICICI Bank is showing promise of better underwriting at this point of the cycle, although we would need a few quarters to establish relative comfort,” say analysts at Kotak Institutional Equities.

The recent rally of 10 per cent in a month may also prompt investors to wait for a better entry point, though its 2.6x FY20 price-to-book valuation isn’t expensive compared to peers (3-4x FY20 book).