Why the street is positive on ICICI Bank

It was least expected that March quarter (Q4) results of ICICI Bank will 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 gradual increase in bad loan additions has helped ICICI Bank stock gain over 12 per cent since last Wednesday. Currently trading at Rs 303, the stock is near its 52-week high. Part of the surge can also be attributed to reports that the stock could see higher weightage in a few key indices which are due for routine re-adjustment, leading to some buying by fund managers. For instance, a report by Morgan Stanley suggests that MSCI could increase its weight on ICICI Bank from 1.2 per cent currently to 2.2 per cent.

While index realignment is a technical factor, even fundamentals were better in Q4. Despite slippages or loans which turned bad touching an all-time high at Rs 11,300 crore, analysts interpreted these numbers optimistically. Those at Phillip Capital say that while the near-term pressure on asset quality will continue, slippages from watch list (loans with potential to turn bad) may be lower than FY17. Analysts believe while unrecognised stressed loans could be about Rs 30,000 crore or 6.4 per cent of loan book, it is lower than 8.5 per cent levels estimated in last March. For those 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).

Even the retail franchise is improving. The ratio of current account – saving account deposits to overall deposits at 50.4 per cent is highest in the last four years, thanks to a good amount of low-cost deposits sticking with the bank post demonetisation. This has 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; retail loans typically enjoy higher margins and are perceived to be safer. While the rapid growth is due to a huge leap in unsecured lending such as credit cards and personal loans (thanks to a low base), even the mainstay home and vehicle loan segments grew at an impressive pace of 15.5 -17 per cent in Q4.

The role of contingency provisioning created in FY16 has come in very handy, saving 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. 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.