Sentiment improves for ICICI Bank

It is difficult to draw a simple good or bad conclusion from ICICI Bank’s September quarter results. The headline numbers were on expected lines. But, a gradual rundown into the profit and loss statement and the investor presentation could tempt you to change your opinion.

Gains of Rs 5,682 crore from the listing of its life insurance business were used to prop up the provisioning for stressed loans, Rs 7,083 crore in the quarter. It was the bank’s highest since the Reserve Bank of India mandated that lenders formally recognise potentially bad loan assets. Likewise, core operating profit shrank 14 per cent year-on-year to Rs 4,224 crore Stock Market Astrology Tips

Slippage remained high at Rs 8,030 crore, largely from corporate and small & medium enterprises (SMEs). However, it has marginally cooled from June quarter levels. Slippages from the watch list and non-stressed book (or standard assets) are expected to remain sticky in FY17. 

Analysts at Morgan Stanley highlight that non-performing asset (NPA) formation outside of the watch list and restructured loans were elevated, at two per cent of loans or on an annualised basis nearly 20 per cent of slippage. “This is high, compared to other private retail banks at 1-1.4 per cent of loans,” they add in their note. 

R Sreesankar, head of research at brokerage Prabhudas Lilladher, adds the management’s refusal to give any colour on their SMA1 and SMA2 dues was disappointing. SMAs or Special Mention Accounts are standard loan accounts which exhibit early warnings signals on repayment. Also, while the watch list declined by 16 per cent sequentially to Rs 32,490 crore, a large part of this is due to NPA recognition. Analysts aren’t pleased with the little information shared on recovery and upgrades. 

If all these are added, the Street is bracing for elevated provisioning and bad loan stress. Jefferies has increased its estimates on provisioning for bad loans from Rs 9,788 crore in FY17 to Rs 14,204 crore. “We would have liked more provision build-up as slippages remain elevated,” the analysts highlight in their report Future & Option Trading Tips

Yet, despite all this, 76 per cent of analysts polled on Bloomberg recommend a ‘buy’ on the stock, with a target price of Rs 312, up from 61 per cent in June. A large part of the improvement in sentiment could be credited to the bank’s ability to sustain a decent loan growth rate while managing the bad loan issues. Total advances (Rs 454,256 crore) grew 11 per cent year-on-year, led by the healthy retail (small borrowers)franchise (up 21 per cent). Home loans, a little over half the retail loan book, grew 19 per cent. Credit cards and personal loans expanded by 35 per cent and 41 per cent year-on-year, respectively.

Likewise, growth of deposits remained strong. The low-cost current and savings account (Casa) deposits increased by 18 per cent over a year, to Rs 205,256 crore. Analysts at Edelweiss say while the large focus has been on asset quality, ICICI seems to be making good progress on strengthening its retail franchise. 

“We see this as the most critical change, as it lays the foundation of low-risk lending in the next cycle,” they add. Likewise, analysts at Elara Capital upgraded their recommendation on the bank to ‘buy’, from ‘accumulate’. “We believe the bank has sufficient capital to absorb near-term asset quality shocks and is relatively better positioned for sustainable business growth,” goes their report.

So, while the bad loans issue won’t die down in a hurry, ICICI could continue to be rewarded if it betters its performance on Casa and loan growth. A visible improvement in asset quality could lead to accelerated re-rating of the stock, currently trading at around 1.6 times its FY18 estimated price to book value. Analysts polled on Bloomberg have set a 12-month target price of Rs 312, up 14 per cent from Friday’s close Astrology and Numerology Trading Tips