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ICICI Bank’s Q4 metrics justify its recent valuation re-rating

ICICI Bank’s operating profit grew 15.5% on the back of a 16.8% growth in its core interest income for the fourth quarter. (Photo: Ramesh Pathania/Mint)Premium
ICICI Bank’s operating profit grew 15.5% on the back of a 16.8% growth in its core interest income for the fourth quarter. (Photo: Ramesh Pathania/Mint)

  • But what investors may fret about is that the bank’s fastest growing loan segment was that of small and medium enterprises. They are most vulnerable during lockdowns, and the second wave has increased instances of lockdowns

ICICI Bank Ltd has hit all the right notes with its performance for the March quarter. Apart from healthy operating metrics, the management’s message exuded confidence for the coming quarters. Not surprisingly, the company’s shares rose over 3% on Monday.

To be sure, analysts had pencilled in a smart recovery from the pandemic’s impact in FY21, which the lender seems to have delivered. ICICI Bank’s operating profit grew by 15.5%, on the back of 16.8% growth in its core interest income during the fourth quarter.

But what is working for ICICI Bank is not just better performance but one that seems to have caught up with the most valuable lender HDFC Bank Ltd. This single factor has meant that ICICI Bank is on the path to bridge the valuation gap with the latter.

Satish Kumar/Mint
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Satish Kumar/Mint


Analysts said in terms of both deposits and loan growth, ICICI has given tough competition to HDFC Bank. “We are encouraged to see the bank report healthy growth of 24% in average CASA balances (CASA ratio at 46%) and retail loan growth of 20% year-on-year. Interestingly, these compare well with HDFC Bank’s 27% y-o-y growth in CASA and 7% growth in retail loans" wrote analysts at Jefferies India Pvt. Ltd in a note.

CASA stands for current account, savings account.

Indeed, ICICI Bank’s loan growth at 14% is not only higher than the industry but also that of peer HDFC Bank. The growth was broad-based with both retail and corporate loan books showing healthy expansion. Sequentially, retail loans grew 6.6%, while the corporate book showed growth of 3.9%. The lender has also benefited from the troubles of HDFC Bank on credit cards. In a call with analysts, management said that the bank has seen market share gains and sharp growth in this segment.

That said, one metric where ICICI Bank is yet to give complete confidence to investors is asset quality. The silver lining here is that for the fourth quarter, it has reported an improvement in asset quality metrics. To be sure, the lender has one of the highest contingency provisions for the pandemic-related risks in the industry. Overall provisioning coverage ratio is the highest in the industry. To that extent, analysts said that incremental provisioning needs would be lower leading to a steady improvement in profitability. This is behind the re-rating of stock recently and the upgrades in earnings per share by some brokerages. Those at Nomura expect credit costs to taper off from here on.

But what investors may also fret about is that the bank’s fastest growing loan segment was that of small and medium enterprises. These are the most vulnerable during lockdowns, and the second wave has increased instances of curbs in the country. What’s more is that retail stressed loans are still higher compared with pre-pandemic levels. ICICI Bank may deserve the boost to its valuations recently, but the lender would have to navigate stress for these valuations to stick.

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