Home / Markets / Mark To Market /  ICICI Bank has outdone its peers; what about valuations now?

India’s lenders have had a good run so far in FY22 but one bank, in particular, has shined brighter. Shares of ICICI Bank Ltd have outpaced the broader market by a huge margin. The lender seems to be in a sweet spot as far as valuations go, especially in the wake of the pandemic.

On Tuesday, a key overhang was also lifted. The Reserve Bank of India (RBI) approved an extension of tenure for managing director Sandeep Bakhshi by two years.

Analysts have taken this as a sign of stable leadership. Those at Emkay Global Financial Services Ltd point out that Bakhshi is eligible for two more full tenures at the helm of the bank.

Keeping it up
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Keeping it up

“Mr. Bakhshi has brought in long-awaited management credibility/stability. Thus, we believe that his longer association with the bank will be essential for the stock’s re-rating hereon," the brokerage said in a report.

An important factor supporting valuations so far, of course, is ICICI Bank’s performance. Both on balance sheet growth and asset quality improvement, the lender has trumped some peers and matched others.

The lender reported 17.2% growth in core interest income on the back of 13.7% loan growth during FY21, a year characterized by the pandemic’s adverse impact.

For the June quarter of FY22, which gave a déjà vu to investors due to the second covid wave, ICICI Bank was able to keep incremental stress under check. That meant that provisioning requirements were low, which enhanced profitability further.

The bank’s proactive provisioning and high buffer provisions over and above the regulatory requirement have also served it well.

Interestingly, what was ICICI Bank’s weak point has become its strength. The lender’s corporate loan book, the biggest source of stress in the past few years, is now helping it offset the pandemic’s blow.

Even as the lender has begun to shed legacy asset-quality problems, the large borrowers have been relatively unscathed by the pandemic. Even the more vulnerable small and medium enterprises (SMEs) seem to withstand the covid blow.

Analysts are now looking at the corporate book as a key source of growth.

“SME/business-banking loans grew strongly at 49% year-on-year in Q1FY22 and we believe that segment can continue to grow at 24% CAGR over FY21-24 as the bank leverages its platform. This should lift the share of such loans to 11% by FY24 that will aid NIMs (net interest margins) and fees, but credit costs and RWA (risk-weighted assets) may be a bit higher," wrote analysts at Jefferies India Pvt. Ltd in a note. CAGR is compounded annual growth rate.

This brings us to asset quality. MSME (micro, small and medium enterprise) loans have been a hotbed of delinquencies and 12.6% of them were bad in FY21 for the banking industry as a whole.

That said, private sector lenders have been able to manage stress far better than their public sector peers or even non-bank lenders. For ICICI Bank, the source of stress during the pandemic has been retail, while its MSME loan portfolio has remained steady.

The upshot is that investors have liked the streak of positive news so far. From here on, though, the private sector lender may find it tough to hold on to investor interest. The bank would need to maintain its asset quality in a potential third wave for investors to keep their faith in it.

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