ICICI Bank: Investor sentiment on a high as share of retail loan rises

Rising share of retail loans, increased digitisation and an abating pool of stressed assets point to improving outlook and have helped the stock deliver 50 per cent returns last year

With 50 per cent gain in 2019, ICICI Bank tops the list of major banking stocks such as State Bank of India, Axis Bank and HDFC Bank, which have delivered between 13-34 per cent returns in this period. Expectations of greater shareholder value under the leadership of its new MD & CEO Sandeep Bakshi has revived investor interest in the stock, which was reeling due to management and asset quality issues around a year back. Going ahead, too, the stock could get further support if these expectations of higher return ratios and steady improvement in business and financials materialise.

Increased focus on retail loans, digitisation and abating stressed-asset pool are expected to provide impetus to its return ratios (such as return on equity and return on assets) over the medium term. According to analysts at Motilal Oswal Securities, ICICI Bank’s return on assets is expected to improve 1.6 per cent by FY21 from around 1 per cent in FY19. The domestic brokerage foresees around 16 per cent upsides in the stock from the current levels, which is higher than high single-digit returns that many brokerages anticipate. The average target price according to Bloomberg poll of analysts indicates an upside potential of about 8 per cent.

Like other large peers, some data points clearly show the bank’s upward thrust for retailisation. For instance, share of retail loans in overall loan book has moved up to around 62 per cent as of September 2019 from 48 per cent three years back and 57.3 per cent as of September 2018. Also, its low-cost current and savings account (CASA) deposits have risen at a compounded annual growth rate of 17 per cent between September 2016 and September 2019. Although at 46.7 per cent the CASA ratio is marginally lower than year ago, it is the second highest among peers.

Going ahead, rising branch network (added 346 branches in September 2019 quarter) and digitisation initiatives are expected to provide good support to the bank’s retail business.

Mona Khetan, analyst at Reliance Securities, says, “Unsecured-personal loan segment and credit card, where ICICI Bank has lower share in loan book relative to other large peers, would drive its retail loan book growth.” Though risks to asset quality cannot be ruled out amidst a weak economy, the bank has fared well so far in these segments with improved data history (through assessment tools like CIBIL) and focus on existing customers, she adds.

ICICI Bank’s continued investment in technology/digitisation is helping in cost efficiency, including customer acquisition costs. For instance, in April-September 2019 period, the bank acquired 42-53 per cent of its customers in personal loan and credit card segments through the digital channel at much lower costs. Focus on technology-led growth across business verticals is likely to help the bank maintain healthy operating metrics.

This apart, the bank’s asset quality, mainly from wholesale/corporate portfolio, also looks favourable, and hence can provide further push to return ratios. Consider this, as per September 2019 quarter data, ICICI Bank’s BB & below-rated (lower rating indicates higher default probability) corporate and SME accounts has further reduced to 2.6 per cent of its total advances compared to 4 per cent a year back. Also, the bank’s exposure to stressed sectors such as power, has also lowered.

According to Motilal Oswal Securities’ report of last month, ICICI Bank has navigated well through a challenging macro environment with limited exposure to newly surfaced stressed names. All these factors should help it fare better in terms of slippages (accounts turning bad), overall bad loans and so on provisioning (refer table).

Most of ICICI Bank’s significant subsidiaries such as ICICI Securities, ICICI Prudential Life Insurance, ICICI Lombard General Insurance and ICICI Prudential AMC are also doing well, and their long term prospects remain good.

In this backdrop, long-term investors could use corrections to buy the stock, which despite last year’s rally is currently trading at 2.7 times FY21 estimated book value compared to 3-4 times for some other private banks.