In the near term, credit growth and asset quality remain key monitorables owing to covid disruptions
Shares of ICICI Bank Ltd fell by 0.8% on Monday, at a time when the broader market was in mayhem with the benchmark Nifty50 index falling 2.7%. To an extent, the private lender’s stellar December quarter (Q3FY22) results, announced on Saturday, protected the downside in the stock.
ICICI did well on many counts in Q3. Healthy net interest income (NII) growth, strong fee income and controlled provisions meant standalone net profit rose 25.4% year-on-year (y-o-y) to ₹6,194 crore, exceeding analysts’ estimates. NII, the difference between interest earned and expended, increased by 23.4% y-o-y.
Further, ICICI’s credit growth of 16.4% y-o-y was led by retail, business banking, and small and medium enterprises (SMEs), which is remarkable. However, 96% of total slippages was contributed by retail and business banking segments, and that is a concern. Kotak Institutional Equities’ analysts said in a report, “Loan growth is still quite sluggish and recovery is still not uniform. Hence, we would see some headwinds on revenues (NIM or slower fee income growth) or higher-than-expected operating expenses growth."
ICICI’s NIM (net interest margin) in Q3 was roughly at 4%—lower 4 basis points (bps) sequentially. One basis point is 0.01%. In comparison, HDFC Bank’s NIM in Q3 was 4.1%.
“It is encouraging that with a combination of improvement in NIM and reduction in credit costs, ICICI Bank has been able to expand its RoA (return on assets) to 1.9% that compares to industry-best levels of HDFC Bank of 2%," said analysts from Jefferies India in a report on 23 January.
Further, the value of financial transactions on digital platform, InstaBIZ for SME and Business Banking grew by 68% y-o-y in Q3.
To be sure, investors have taken note of ICICI’s consistent earnings delivery in the past few quarters. The stock is up 47% in the last one year. Kotak’s analysts point out, “We have seen the bank’s valuation expand sharply post the initial covid lockdown. We see further room for expansion even as we are cognizant that the bank is trading close to its peak valuation. However, this is likely to be gradual and driven by consistent execution rather than any positive surprise on operating metrics hereon." Jefferies’ analysts say that improvement in return on equity will drive the next leg of rerating for the stock.