Regaining the mojo: Here's what is driving ICICI Bank's return to normalcy

Street's confidence in the stock is at an all-time high, and so are the valuations

After its September-quarter (Q2) results, ICICI Bank had indicated that normalcy was certainly on course for its stock after four painstaking years. The Street may have picked that earlier, if the stock’s sharp outperformance in the past three months is anything to go by.

Among the key takeaway was the bank’s net non-performing asset (NPA) ratio. At 1.7 per cent in Q2, it was close to the level seen in its pre-asset quality review (AQR) days. Also, its annualised credit cost or losses because of credit risk fell to 170 basis points (bps) from 300 bps last year. At the peak of the AQR clean-up, the bank’s credit cost had touched 627 bps. With monies estimated to flow in from the three big cases lined up for resolution — of those, Essar Steel has already turned in bankers’ favour — credit cost is estimated to decline further to 120-130 bps in 2019-20.

Besides, slippages or loans turning bad were restricted to 2.6 per cent of the loan book — about a fifth of the 11.4 per cent seen at the peak of the AQR clean-up phase. The watch list, or the pool of stressed assets, however, remained sticky at Rs 16,074 crore, because of an addition of Rs 2,072 crore during the September quarter. Much of the increase came from loans with a low rating quality, indicating these loans might remain a trouble spot for the bank in the near term. “We will be actively monitoring the watch list,” says Suresh Ganapathy of Macquarie Capital.

The breather though comes in the form of an improving corporate loan quality. Nearly 66 per cent of the book belongs to borrowers with healthy credit ratings (A- and above); this has increased from 56 per cent two years ago. As a result, the share of loans with low credit profile (BBB+ and below) reduced from 37.9 per cent in 2016-17 to 31.8 per cent in Q2 of this financial year. That said, Q2 did witness a jump in loan additions to the ‘BB and below’ loan book, prompting Elara Capital to say this was indeed a cause for concern.

On the whole, though, the overall picture gives evidence that the bank’s asset quality has improved many notches. 

Another promising aspect is the changing asset landscape. From a 56 per cent share of retail assets in 2017-18, the bank has used the corporate lending crisis to boost its retail presence — the 62 per cent retail share for the bank in Q2 was the highest among private banks. A reassuring factor for ICICI Bank is that it has a relatively diversified retail book and more of it is an organically cultivated book.

Home, rural and vehicle loans make for the bulk of its retail portfolio. The gross NPA for retail loans, however, increased from 1.73 per cent a year ago to 1.96 per cent in Q2, indicating even as ICICI Bank’s portfolio was lighter on unsecured loans, the risk in retail assets was catching up, as was the case with the system.

An improvement in the loan mix and easing of the bad-loan issue helped profitability and return ratios swing positively. This also explains why analysts have now become more positive on the stock than earlier. With 56 ‘buy’ recommendations and literally no sell ratings, bets on ICICI Bank are at a lifetime high.

Another factor which could provide some technical support is that the proportion of foreign holding in ICICI Bank has declined from 65 per cent in September 2016 to 54.6 per cent in September 2019. Lately, ICICI Bank’s weight on MSCI India has increased to 5.42 per cent from 3.12 per cent, highlighting a growing interest among foreign investors. “In the next two-three quarters, we expect ICICI Bank to stop taking NPA coverage and its return on equity to snap up. That's what makes ICICI Bank an attractive stock to own, against a weak macro backdrop,” say analysts at Morgan Stanley.

With such high bets, it is critical that the bank continues to deliver on its promise to sustain the momentum.