ICICI Bank stock surges 11% after a strong second quarter, Street bullish

Stock soars 11% post strong Q2; analysts say improving asset quality and rising share of low-cost deposits enhance earnings potential

Shares of ICICI Bank (ICICI) surged 10.8 per cent on Monday to close at Rs 349.15 after the lender posted strong results for September 2018 quarter (Q2) last Friday post market hours. Most analysts see the results in positive light, and have either retained their buy rating and expect further gains from hereon.

Key positive element was the improvement in overall asset quality, which helped the private corporate lender return to the black, posting net profit of Rs 9.1 billion. Though the profit is down 56 per cent year-on-year, it comes after the bank reported a loss in the previous quarter. Gross non-performing assets (NPAs) or bad loans as a percentage of gross advances fell by 35 basis points to 9.3 per cent, as compared to the June 2018 quarter. Also, the share of stressed book, including sub-investment grade loan accounts (with credit ratings of BB and below), in total advances fell to 4.6 per cent as of September 2018 from 5.4 per cent in June 2018. "The improved asset quality along with robust growth in low-cost current and savings account (CASA) and expected loan book growth with focus on retail customers provide comfort in terms of near term earnings potentials," say analysts.

Analysts at Edelweiss Securities said, “We believe, ICICI Bank is well-geared for next cycle with improved traction in quality asset growth, robust CASA franchise, efficiency gains and improved NIM (net interest margin).” The analysts, who have given ‘Buy’ rating for the stock, also believe the bank is on track to de-risk its balance sheet with improved share of better rated loan accounts, lower concentration risk, higher retail proportion and lower proportion of risk weighted assets (less than 73 per cent versus 84 per cent in FY16). Even the exposure to stressed sectors such as power, iron and steel is declining steadily.  

Moreover, stability in terms of the management further adds to positives. As per JM Financial’s Q2 results update, the leadership transition and strong improvement in provision coverage ratio (up 11 per cent in 1HFY19), provide further comfort. Analysts at this domestic brokerage are also positive on the stock amid lower valuation (1.8-1.9 times FY20 estimated book value), immensely value generating subsidiaries and strong growth capital levels.

Many analysts expect gross NPAs of ICICI Bank to fall to 8.2-8.7 per cent in FY19 and further to 6.3-6.7 per cent. This along with 17-20 per cent rise in net interest income is expected to help the bank post a growth in net profit in FY19, after standalone profits declined 31 per cent in FY18. FY20 is expected to see strong increase in earnings, analysts estimate.

"ICICI Bank is in the midst of an improvement in the operating environment (stressed asset resolution and growth pick-up) and is showing healthy signs of earnings normalisation," said Motilal Oswal Securities, which has a buy on the stock with a target price of Rs 400.