Magic of positive commentary; ICICI Bank stock up 9%

Part of surge can also be due to reports that stock could see higher weightage in key indices

It was least expected that the March quarter (Q4) results of ICICI Bank would create such a huge impact on its stock price. The bundled effect of net profit trebling, loan growth looking positive, and more importantly, the optimistic management commentary on slower increase in bad loan additions helped ICICI Bank's ADR (American depository receipt) trade up by 4.4 per cent on Wednesday night (Indian time) itself. On Thursday, the stock hit a 52-week high of Rs 299.35, before closing with almost 10 per cent gains. Part of the surge can also be attributed to reports suggesting that the stock could see higher weightage in a few key indices which are due for routine re-adjustment, and as a result could lead to some buying by fund managers.

Meanwhile, in Q4, while slippages or loans which turned bad were at all-time high at Rs 11,300 crore and there was little respite on the asset quality concerns, analysts interpreted these numbers optimistically. For instance, analysts at Phillip Capital say that while the near-term pressure on asset quality will continue, slippages from watch list may be lower than FY17. They believe that unrecognised stress loan is about Rs 30,000 crore or 6.4 per cent of loan book. For analysts at Edelweiss, FY17 was perhaps a year of pain recognition, while recovery and resolution would be critical going ahead. Nonetheless, they warn that with the bank consuming its contingency buffer created out of stake sale in its insurance businesses, the room for significant provisions from here on without hurting the balance sheet is limited. Therefore credit costs may remain high in FY18 (at about 250 basis points).

Nonetheless, the Street is betting high on the bank's improving retail franchise. The ratio of current account - saving account deposits to overall deposits at 50.4 per cent is at the highest levels in the last four years, thanks to a good amount of low-cost deposits sticking with the bank post demonetisation. This has in fact helped net interest margins scale to 3.96 per cent in Q4. Alongside this, the share of retail loans to overall loan book is also at an all-time high of over 51 per cent. While the rapid expansion is due to an huge leap in unsecured lending such as credit cards and personal loans (thanks to a low base), even the mainstay home loan and vehicle loan segment grew at an impressive pace of 15.5 -17 per cent in Q4.

What's also encouraging is that despite the elevated provisioning and slippages, the availability of contingency provisioning saved the bank from having to consume capital towards cleanings its books. Hence, capital adequacy remained strong at 17.4 per cent. The bank had raised Rs 3,425 crore of additional Tier-1 capital in Q4 to augment its position going forward. Therefore, analysts at Motilal Oswal Financial Services, feel that strong capitalisation, significant improvement in granularity of loan book and sustained improvement in liability profile are the key positives going ahead. That said, all this is based on the underlying assumption that slippages will moderate in FY18. In fact, this promise has lifted the sentiment around the stock to the highest levels in the last six months. However, given Thursday's surge, gains may be steady from here on.