ICICI Bank: Investors should wait for a turnaround in credit demand

When Sandeep Bakshi took charge as the MD & CEO of ICICI Bank in October 2018, the bank was in a volatile state. Yet, he guided the bank to a quick turnaround and delivered the goods. Now, against the backdrop of Covid-19 pandemic, it seems that the bank's growth story will take a pause as the management has changed its outlook from optimistically cautious to extremely cautious in March quarter (Q4). While the change in stance is good in the current situation, it will have an impact on financials.

Unlike its private peers, ICICI Bank is also more watchful of the emerging situation as compared to peers. HDFC Bank and Axis Bank, for instance, said they would aim to maintain market-leading/decent growth.

ICICI Bank provided Rs 2,725 crore for likely asset quality disruption due to Covid-19. This took the provisioning cost higher to Rs 5,967 crore, up 9.5 per cent year-on-year and 186 per cent, sequentially. It also ate into its net profit, which at Rs 1,221 crore grew by 26 per cent yoy, but was down 71 per cent, sequentially. After a strong December quarter, Q4’s net profit disappointed analysts.

Gross non-performing assets (NPA) and net NPA ratio shrank to 5.53 per cent and 1.41 per cent from 5.95 per cent and 1.49 per cent, respectively, in Q3. Save for two large overseas accounts – a healthcare company and oil company, recognised as NPA, slippages may not have risen to Rs 5,306 crore in Q4, up 21 per cent sequentially. Yet, calling Q4 as an aberration on the bank’s improving asset quality may be jumping the gun.

The share of its below investment grade book (BB and lower rated accounts) dipped by 4 per cent sequentially to Rs 16,668 crore in Q4. However, analysts at Motilal Oswal Financial Services feel that in the current operating environment, share of these loans may increase. Credit cost could remain elevated at 2.2 per cent in FY21. However, there has been an uptick in the share of SMEs, personal and credit card loans. So, these will also need monitoring.

Meanwhile, whether the bank gets comfort from loan growth to keep its asset quality under check is doubtful given the cautious management commentary. “The focus now is preserving capital and enhancing deposits,” said Sandeep Batra, president, ICICI Bank, in a media call. He also suggested that credit demand is quite weak. “Its not a question of tightening the belt, demand itself has come off,” he said. With 63 per cent of its loan book aligned to retail loans, if the segment doesn’t keep pace with 15 – 18 per cent past run-rate, overall growth and profitability will plunge. Banks generate fee income by processing new loans, and Q4 saw fee income stay flat sequentially.

Rajiv Mehta of YES Securities feels that such a cautious commentary could spook the markets. Also, with 30 per cent of the bank’s loan under moratorium, how investors will react to it needs to be seen. ICICI Bank stock has corrected 37 per cent in three months. But investors should not rush into it. Waiting for a turnaround in credit demand may be prudent.