ICICI Bank: Asset stress may cap upsides

Inexpensive valuations, likely recovery from some clients, well-capitalised book are triggers

ICICI Bank was among the biggest gainers in the banking sector, up 3.7 per cent in Monday's trade. But, the sharper gains might not sustain given the pressure on the asset quality front, a key reason for the stock’s underperformance in recent months.

While announcing the December 2015 quarter results, the bank's management had indicated it would account for similar slippages of Rs 6,544 crore in the March 2016 quarter as well - half of which would come in from the restructured books. In a report dated March 9, ratings agency Moody’s said ICICI Bank's asset quality woes would spill over to FY17 as well. This view is echoed by most analysts given the bank's exposure to some larger, troubled groups in the steel and power sectors (10 per cent of its domestic loans).

At the end of the December quarter, the gross non-performing asset of ICICI Bank stood at 4.7 per cent, whereas for its comparable peer Axis Bank, the same was 1.68 per cent.

  On the flip side, Moody’s has maintained its ratings as well as positive outlook on ICICI Bank and its financial instruments. The bank’s sufficient capital adequacy and healthy provisioning coverage are likely reasons for the positive stance. Also, ICICI Bank's management has stepped up efforts towards recoveries and containing bad loans, which might take a couple of quarters to start bearing fruits.

Additionally, given its relatively high exposure to sectors such as infrastructure, metals and power, ICICI Bank will be among the biggest beneficiaries of an improvement in economic growth. Thus, most analysts remain positive on the stock and expect it to gain about 30 per cent over a 12-month period. But, all this hinges on a visible recovery in the economy, especially core sectors. Aditya Narain, managing director of Citi India, said recent report: “ICICI Bank needs a stronger/longer upcycle, but with more to fix (asset quality, returns, risk appetite) and a valuation cushion, gains will likely be lagged but stronger than Axis Bank.”

Recent reports, however, suggest that ICICI Bank has acquired land worth Rs 1,500-1,800 crore from JP Group, to which it had an estimated exposure of Rs 6,600 crore at end-March 2015. The sale of JP’s cement business to UltraTech will further aid the bank's asset quality.

If these materialise soon, it could lead to faster than expected gains for ICICI Bank, which currently trades at 1.3 times FY17 estimated book value (historical average of 1.8 times) versus 1.6 times for Axis Bank.