No place is happier than a marketplace where collective bets have gone right. Investors of ICICI Bank Ltd, India’s second-largest private sector lender by assets, seem to be in this happy place.
They have good reason to be, as ICICI Bank's Q3FY22 performance has been nothing short of stellar. The private lender on January 22 reported a 25.4 percent rise in its net profit, beating street estimates. But what has elated analysts is that this growth comes from an 18 percent increase in core interest income unlike most of its peers where lower provisions have been the primary boost.
Even more encouraging was that the bank’s key metrics trumped that of the most valuable lender HDFC Bank Ltd. Most brokerages have raised their target price for the stock yet again and some have even upgraded the rating.
Analysts at Kotak Securities summarised the sentiment and said “hard to ignore and we are running out of adjectives to describe one of the best recovery in large banks that we are witnessing.”
Strong growth in net interest income (NII), the difference between the interest income the bank earned from its lending activities and the interest it paid to depositors, signals growth in not just lending but also an improvement in stressed assets.
Simply put, ICICI Bank is earning big through lending and losing less through bad loans. The bank’s loan growth was 17.9 percent, outstripping that of its rival HDFC Bank and expected to leave behind others too as more banks announce their quarterly results in the coming days.
Also read: What should investors do with ICICI Bank post Q3 earnings; buy, sell or hold?
Healthy growth
The bank’s management said that the growth is broad-based, with both retail and corporate books expanding at a healthy pace. The retail loan book growth was 18.6 percent and the corporate book grew 12.5 percent but the bank’s loans to small and medium enterprises showed an eye-popping 34.2 percent growth.
This brings us to the asset quality, which hasn’t been great for retail and small business loans ever since the coronavirus pandemic hit in 2020.
Even for ICICI Bank, the stress in the retail book has surged. More than 80 percent of incremental stress has been from the retail book over the past five quarters. That trend continues to remain as 94 percent of slippages was retail in Q3FY22. That said, ICICI Bank’s overall gross slippages have steadily come down to Rs 4018 crore for the December quarter. Its gross bad loans are just 4.13 percent of its loan book, which is the lowest in more than two years.
But growth when pursued right can be the cure of all ills. Analysts believe that for the bank to keep improving its valuations, it must continue to report strong growth in core income.
“Further expansion of valuation is likely to be gradual and driven by consistent execution rather than any positive surprise on operating metrics hereon,” Kotak Securities' analysts said.
Is there a dark cloud behind this rainbow? A sharp growth in the vulnerable SME loan book should keep investors vigilant. Moreover, ICICI Bank’s efforts of bringing down its stressed loan pile which it calls the "bb and below book" has slowed since the pandemic. The book stands at Rs 11,842 crore, or 2.7 percent of the total loan portfolio.
Previous episodes of high growth have been followed by increased stress for the bank. For example, the credit card surge prior to 2008 resulted in the bank piling on stress and the corporate loan book pain is well known. The growth this time looks more promising and less troublesome and the valuation distance from its rival looks easy to bridge.
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