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ICICI: Good tidings roll, more needed

The sale of Essar Oil to Rosneft is a key trigger behind the lender's 12% rally this week so far

The stock has surged nearly 12 per cent this week, outpacing S&P BSE’s Sensex and Bankex, up 1.4 and 2.9 per cent, respectively, this week. The sale of Essar Oil to is a key positive for this rally as the bank has a meaningful loan exposure to the Essar Group. Hence, the deal could rub off favourably on its assets, which include loans. The bank said its exposure to the group will halve because of this deal, either due to part-repayment (in case of Essar Steel, which is a non-performing asset or NPA) or transfer of loan outside the (Essar Oil). This boosted sentiment.

While the bank has not specified its loan exposure to the group, analysts have made estimates. For instance, the bank's loan exposure to Essar Steel was brought down from over Rs 3,000 crore after it sold loans worth Rs 1,600 crore to asset reconstruction companies in July. Reports suggested this sale happened at a 40-50 per cent discount and left the bank with only working capital loans of Essar Steel. Working capital of a business is used in its day-to-day operations.

"has been one of the largest lenders to Essar Group, with estimated exposure of 15-20 per cent of the group’s debt,” says Veekesh Gandhi of Bank of America Merrill Lynch. Analysts at Motilal Oswal Securities believe Essar Steel would be the largest case of NPA resolution for the system as it forms 10 per cent of NPAs or bad loans. Essar Group’s total debt from banks is Rs 1.1-1.3 lakh crore, of which Essar Oil accounted for Rs 28,000 crore.

Though Essar Oil was not termed a bad loan and is not on ICICI Bank's watch list (which comprises loans that can go bad), this list did include Essar Steel. Suresh Ganapathy, analyst at Macquarie Capital, says, "Loans to promoter entities form 17 per cent of ICICI Bank's watch list and we believe a large part of that will be constituted by Essar Global Holdings, which is going to get the money from this deal." The bank's watch list stood at Rs 38,723 crore at the end of the June quarter and could shorten going forward. The exact impact will be known when the company announces its September quarter results on November 7.

ICICI: Good tidings roll, more needed
Besides this deal, a couple of other factors will strengthen the bank's loans. Improving prospects of domestic steel companies, many of which are now making operating profits, due to imposition of minimum import price. This means the bank can classify as S4A, which requires banks to separate the sustainable part of the bad loans based on the borrower's ability to repay the debt.

also has seen better resolution of bad loans in cases of Jaiprakash Group and Gammon, among others. Also, the recent initial public offering (IPO) of shares of its life insurance subsidiary, ICICI Prudential Life, can be used to shore up its loan-loss provisioning and loan growth.

Overall, most analysts are positive on the stock given its well-capitalised book, healthy operating profits, and return ratios. The bank will be among the few to benefit from recovery in steel and infrastructure sectors. "We believe the bank has the provisioning cushion to deliver 10 per cent and 25 per cent earnings per share growth after assuming fresh bad loan formation of Rs 25,000 crore and Rs 12,500 crore in FY17 and FY18, respectively," adds Gandhi.

He believes the risk-reward is favourable on the stock and has a target price of Rs 320, indicating an 18 per cent upside from Tuesday's closing price of Rs 270. Gandhi also says recent news flow on deals going through for indebted companies is positive for banks like ICICI, while adding that the franchise value of the bank is being overlooked by markets.

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Business Standard

ICICI: Good tidings roll, more needed

The sale of Essar Oil to Rosneft is a key trigger behind the lender's 12% rally this week so far

Sheetal Agarwal  |  Mumbai 

ICICI bank signboard is reflected in a puddle on a street in New Delhi
ICICI bank signboard is reflected in a puddle on a street in New Delhi

The stock has surged nearly 12 per cent this week, outpacing S&P BSE’s Sensex and Bankex, up 1.4 and 2.9 per cent, respectively, this week. The sale of Essar Oil to is a key positive for this rally as the bank has a meaningful loan exposure to the Essar Group. Hence, the deal could rub off favourably on its assets, which include loans. The bank said its exposure to the group will halve because of this deal, either due to part-repayment (in case of Essar Steel, which is a non-performing asset or NPA) or transfer of loan outside the (Essar Oil). This boosted sentiment.

While the bank has not specified its loan exposure to the group, analysts have made estimates. For instance, the bank's loan exposure to Essar Steel was brought down from over Rs 3,000 crore after it sold loans worth Rs 1,600 crore to asset reconstruction companies in July. Reports suggested this sale happened at a 40-50 per cent discount and left the bank with only working capital loans of Essar Steel. Working capital of a business is used in its day-to-day operations.



"has been one of the largest lenders to Essar Group, with estimated exposure of 15-20 per cent of the group’s debt,” says Veekesh Gandhi of Bank of America Merrill Lynch. Analysts at Motilal Oswal Securities believe Essar Steel would be the largest case of NPA resolution for the system as it forms 10 per cent of NPAs or bad loans. Essar Group’s total debt from banks is Rs 1.1-1.3 lakh crore, of which Essar Oil accounted for Rs 28,000 crore.

Though Essar Oil was not termed a bad loan and is not on ICICI Bank's watch list (which comprises loans that can go bad), this list did include Essar Steel. Suresh Ganapathy, analyst at Macquarie Capital, says, "Loans to promoter entities form 17 per cent of ICICI Bank's watch list and we believe a large part of that will be constituted by Essar Global Holdings, which is going to get the money from this deal." The bank's watch list stood at Rs 38,723 crore at the end of the June quarter and could shorten going forward. The exact impact will be known when the company announces its September quarter results on November 7.

ICICI: Good tidings roll, more needed
Besides this deal, a couple of other factors will strengthen the bank's loans. Improving prospects of domestic steel companies, many of which are now making operating profits, due to imposition of minimum import price. This means the bank can classify as S4A, which requires banks to separate the sustainable part of the bad loans based on the borrower's ability to repay the debt.

also has seen better resolution of bad loans in cases of Jaiprakash Group and Gammon, among others. Also, the recent initial public offering (IPO) of shares of its life insurance subsidiary, ICICI Prudential Life, can be used to shore up its loan-loss provisioning and loan growth.

Overall, most analysts are positive on the stock given its well-capitalised book, healthy operating profits, and return ratios. The bank will be among the few to benefit from recovery in steel and infrastructure sectors. "We believe the bank has the provisioning cushion to deliver 10 per cent and 25 per cent earnings per share growth after assuming fresh bad loan formation of Rs 25,000 crore and Rs 12,500 crore in FY17 and FY18, respectively," adds Gandhi.

He believes the risk-reward is favourable on the stock and has a target price of Rs 320, indicating an 18 per cent upside from Tuesday's closing price of Rs 270. Gandhi also says recent news flow on deals going through for indebted companies is positive for banks like ICICI, while adding that the franchise value of the bank is being overlooked by markets.

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ICICI: Good tidings roll, more needed

The sale of Essar Oil to Rosneft is a key trigger behind the lender's 12% rally this week so far

The sale of Essar Oil to Rosneft is a key trigger behind the lender's 12% rally this week so far The stock has surged nearly 12 per cent this week, outpacing S&P BSE’s Sensex and Bankex, up 1.4 and 2.9 per cent, respectively, this week. The sale of Essar Oil to is a key positive for this rally as the bank has a meaningful loan exposure to the Essar Group. Hence, the deal could rub off favourably on its assets, which include loans. The bank said its exposure to the group will halve because of this deal, either due to part-repayment (in case of Essar Steel, which is a non-performing asset or NPA) or transfer of loan outside the (Essar Oil). This boosted sentiment.

While the bank has not specified its loan exposure to the group, analysts have made estimates. For instance, the bank's loan exposure to Essar Steel was brought down from over Rs 3,000 crore after it sold loans worth Rs 1,600 crore to asset reconstruction companies in July. Reports suggested this sale happened at a 40-50 per cent discount and left the bank with only working capital loans of Essar Steel. Working capital of a business is used in its day-to-day operations.

"has been one of the largest lenders to Essar Group, with estimated exposure of 15-20 per cent of the group’s debt,” says Veekesh Gandhi of Bank of America Merrill Lynch. Analysts at Motilal Oswal Securities believe Essar Steel would be the largest case of NPA resolution for the system as it forms 10 per cent of NPAs or bad loans. Essar Group’s total debt from banks is Rs 1.1-1.3 lakh crore, of which Essar Oil accounted for Rs 28,000 crore.

Though Essar Oil was not termed a bad loan and is not on ICICI Bank's watch list (which comprises loans that can go bad), this list did include Essar Steel. Suresh Ganapathy, analyst at Macquarie Capital, says, "Loans to promoter entities form 17 per cent of ICICI Bank's watch list and we believe a large part of that will be constituted by Essar Global Holdings, which is going to get the money from this deal." The bank's watch list stood at Rs 38,723 crore at the end of the June quarter and could shorten going forward. The exact impact will be known when the company announces its September quarter results on November 7.

ICICI: Good tidings roll, more needed
Besides this deal, a couple of other factors will strengthen the bank's loans. Improving prospects of domestic steel companies, many of which are now making operating profits, due to imposition of minimum import price. This means the bank can classify as S4A, which requires banks to separate the sustainable part of the bad loans based on the borrower's ability to repay the debt.

also has seen better resolution of bad loans in cases of Jaiprakash Group and Gammon, among others. Also, the recent initial public offering (IPO) of shares of its life insurance subsidiary, ICICI Prudential Life, can be used to shore up its loan-loss provisioning and loan growth.

Overall, most analysts are positive on the stock given its well-capitalised book, healthy operating profits, and return ratios. The bank will be among the few to benefit from recovery in steel and infrastructure sectors. "We believe the bank has the provisioning cushion to deliver 10 per cent and 25 per cent earnings per share growth after assuming fresh bad loan formation of Rs 25,000 crore and Rs 12,500 crore in FY17 and FY18, respectively," adds Gandhi.

He believes the risk-reward is favourable on the stock and has a target price of Rs 320, indicating an 18 per cent upside from Tuesday's closing price of Rs 270. Gandhi also says recent news flow on deals going through for indebted companies is positive for banks like ICICI, while adding that the franchise value of the bank is being overlooked by markets.
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