ICICI Bank: Improved asset quality to revive sentiment

Healthy outlook on loan growth, profitability, asset quality are key positives

ICICI Bank delivered quite a few surprises through its June quarter numbers, good on all key parameters of loan growth, margins and asset quality. This was the second quarter in a row where incremental stress in its books was lower than expected. The results sent the stock higher as much as six per cent intra-day before closing with a net gain of four per cent at Rs 303.

Heightened asset quality concern is a key reason  under-performance of its stock, both versus the Sensex and peers such as HDFC Bank and Axis Bank, in the past year.

The better-than-expected quarter results suggest these concerns would have eased slightly. The numbers also point to that. Compared to the March quarter when non-performing assets (NPAs) increased by Rs 3,260 crore, the fresh addition in June quarter was Rs 1,672 crore. The fresh slippages from restructured book to NPAs was also a paltry Rs 292 crore. As a result, the headline gross as well as net NPA ratios, too, improved sequentially to 3.7 per cent and 1.6 per cent, respectively. Provisioning also fell 29 per cent to Rs 956 crore over the March quarter. All this points to easing of asset quality stress.

More importantly, the management believes credit costs will improve to 90-95 basis points in FY16 versus 1.1 per cent in FY15. Provisions or credit costs numbers will assume higher significance going forward given the closure of restructuring window for banks. Chanda Kochhar, managing director and CEO of ICICI Bank, believes additions to stressed loans will be lower than FY15 and indicated the worst is behind for the bank on the asset-quality front. While Axis Bank witnessed a spike in provisions sequentially, its management remains confident of lower addition to stressed assets in FY16. All three large private banks reported healthy performance in the quarter.

 

Meanwhile, ICICI Bank's retail loan book (43 per cent of total advances) grew at a robust 25 per cent fuelled by healthy traction in the home and car loans. Corporate loans grew nine per cent for the second quarter in a row, higher than four per cent seen in the December 2014 quarter, led by focus on working capital funding and on highly rated corporates. Overall, loans grew 15 per cent - in line with recent trends. What, though, provides comfort, given the subdued economic environment is the management’s expectation of growing its domestic book by a healthy 18-20 per cent and maintaining net interest margins at current levels in FY16. If achieved, it should further boost investor sentiments.

While the ICICI Bank scrip trades at 2.3 times FY16 estimated book versus historical average of 1.7 times one-year forward book, most analysts are bullish and believe it is well placed to benefit from an economic revival. While exposure to infrastructure (12 per cent of loans), steel and power (another 12 per cent) needs to be watched, a positive commentary on asset quality provides some comfort.