ICICI Bank rides high on improved investor sentiment

Ramp-up of retail franchise, gains from subsidiaries' sale may cushion incremental provisioning

From a year ago, when over half of the analysts tracking the ICICI Bank stock were cautious, a lot has changed in its favour. As of June 1, over 85 per cent recommend ‘buy’ on the stock, suggesting that optimism for the bank is higher now than a year ago. 

With this, the gap between the number of ‘buy’ calls on ICICI Bank is not too different from that of HDFC Bank. The ICICI Bank stock hit a fresh 52-week high on Thursday, reflecting the Street’s confidence about the bank’s prospects. 

The reason for the optimism is ICICI Bank’s ability to rapidly expand its retail business — on the deposit and lending sides. 

From contributing 46 per cent to the loan book in FY16, the share of retail loans increased to 52 per cent on March 31, 2017. A stable expansion of the bank’s mainstay retail product — home loans, up 18 per cent year-on-year in the March 2017 quarter is a positive. 

Vehicle finance, the next big retail portfolio, also complimented growth. Even the smaller (but unsecured) products, such as credit cards and personal loans, lended support. This is critical, given that the corporate loan book (Rs 1,26,735 crore as on March 31, 2017) is growing at dismal single digit, mirroring the industry trend. 

Demonetisation has been a boon for ICICI Bank. Low-cost current account–savings account ratio touched an all-time high of 43.7 per cent in FY17 (versus 40.7 per cent in FY16), while overall deposit growth was maintained at 16 per cent. 

Some outflow of deposits garnered during demonetisation is possible as withdrawal norms have been eased since March. Investors should also expect net interest margin to stay in the three per cent range in FY18 (versus 3.6 per cent in Q4) as retail loans are relatively less rewarding compared to corporate loans. Conversion of loans to cheaper marginal cost of funds based lending model may also weigh on margins. 

Nonetheless, growing relevance of retail business is good. 

Analysts at UBS Securities say the strength of ICICI Bank’s retail book is relatively untapped. “ICICI Bank is one of the market leaders in the retail banking and digital channels. We believe these businesses are undervalued (given the stock’s valuation discount to peers like Axis Bank, IndusInd Bank and HDFC Bank) due to concerns about ICICI’s corporate balance sheet,” they observe. 

But one shouldn’t brush aside the asset quality woes ahead in the next 12-18 months. 

Analysts at Citi say that while credit costs may moderate, it may remain elevated at two per cent of loans in FY18. However, analysts at PhillipCapital do not rule out the possibility of tentative gains from stake sale in general insurance business to act as a cushion for the stressed assets. With the provision buffer being exhausted, creation of fresh buffer may yet again help the bank like it did in FY17.