Valuation rerating ahead for ICICI Bank; Q1 loan growth at 14-quarter high

A lot has been going in favour of ICICI Bank over the past few quarters. The stock has risen over 40 per cent in a year as management-related issues have been resolved. However, the June quarter (Q1) results, published over the weekend, seem to be the most convincing proof that the worst in terms of asset quality may be behind.

Net non-performing asset (NPA) ratio at 1.8 per cent and domestic loan growth at 18 per cent year-on-year (YoY) have been the best in 14 quarters. Analysts at Edelweiss said ICICI Bank was poised to deliver sustainable core profit growth with a de-risked balance sheet and strengthened franchise. Consequently, confidence in the ICICI Bank stock is also at an all-time high. With nearly no ‘sell’ recommendations on the stock, 50 of the 53 analysts polled by Bloomberg have a ‘buy’ rating. The last time the lender enjoyed this comfort from analysts was in 2014.

While the bank is headed for better days, it is important for investors not to lose sight of a few critical aspects. Firstly, as is the case with most private banks, the share of ICICI Bank’s low-cost current account savings account (CASA) deposits declined 530 basis points YoY to 45.2 per cent in Q1. Secondly, while retail loans grew at a healthy 22 per cent YoY, slippages, too, seem to be increasing from retail loans, mainly its agri-loans portfolio. At Rs 1,500 crore of slippages, the pace of bad loan accretion increased 36 per cent in the retail segment while it has more than halved over the past year for corporate loans.

Lenders are also turning cautious on unsecured retail portfolios. While ICICI Bank’s exposure to unsecured loans (personal loans and credit cards) is 13 per cent of total retail exposure, well below that of its competitors, it is imperative that fresh trouble doesn’t emerge from retail loans. Retail gross NPA ratio has risen from 1.7 per cent a year ago to 1.9 per cent in Q1. With the share of retail loans now at over 61 per cent, a further increase in retail stress may derail the investor confidence.

While these are monitorables in the medium term, Monday’s gains of over 3 per cent have reduced the valuation differential between ICICI Bank and Axis Bank. Both now trade at 2.4x FY20 estimated book. Analysts at Kotak Institutional Equities say a rerating is well on the cards if ICICI Bank steers its balance sheet with a lower-than-peers NPA ratios and stable return ratios. While the private bank has regained investor confidence, sustaining it will be a challenge in FY20.