Can ICICI bounceback continue or will Q4 upset the rally?

ICICI Bank has a decent recovery from its low point on February 25 and the stock has rallied 20 percent since then. However, market sentiment towards the company’s consistency is still divided.

Nitin Kumar of Prabhudas Liladher maintains a bullish stance on the company and keeps a target of Rs 300 on the stock. He expects the stock to remain under pressure in near term due to current corporate clean-up move and estimates FY17 return in equity (RoE) to be around 14-15 percent.

On the contrary, Parag Jariwala of Religare Capital maintains a sell rating on the stock as ICICI missed its third quarter guidance for FY16 and expects the same for the fourth quarter.

According to him the asset quality guidance is also weak for FY17.Below is the verbatim transcript of Parag Jariwala & Nitin Kumar’s interview with Latha Venkatesh & Anuj Singhal on CNBC-TV18. Anuj: I believe you are a bear, so at current levels why are you concerned about the ICICI Bank? Jariwala: The Reserve Bank of India (RBI) asset quality review which is going as under they had very high amount of slippages in third quarter. I expect fourth quarter will have similar quantum of slippages, right. Now having said that couple of very large accounts like probably the JP Associates and etc, Essar or Bhushan Steel they are still like standard or a restructured asset in the books of the banks. On which banks are carrying a provision anywhere between 0 to only 5 percent and this assets to get revive a comeback on footing I think you require a haircut of minimum 30-50 percent. In that case the entire asset quality pain is not yet in the price. So, that makes me negative. Latha: Since the asset quality review announcement there is a minimum import price (MIP) for steel announced, China has announced a fiscal push, copper for sure commodity chartist tell us has bottomed out and now there is missionary zeal in recovering assets don’t all these add up to something that perhaps the worst of asset pain is over? Jariwala: Whatever is happening is good. It is kind of creating fear of God in the minds of the promoters. By and large, these all things are very positive so far is the next cycle is concerned. However, in this cycle whatever extra lending you have done let us say a steel plant is able to service loans only up to Rs 10,000 crore and if you have given Rs 20,000 crore of loan, there is no way, you have to write down the extra Rs 10,000 payr. So, that kind of a write off is not going to go away. Probably the recovery may be slightly faster etc. However, ultimately pain banks will have to take. Latha: You like ICICI, why? Kumar: Though they are concerns in the near-term and clean up drive will continue to impact all the corporate banks but ICICI is still a great franchise. Problems that they are creating is largely due to the legacy assets and they were lent many years back and post that we had all sorts of issues in the infrastructure sector. One has to tide over it and go through the pain which all banks are doing including ICICI. If I look at the kind of franchise that they have built, the sort of growth they have delivered in the retail which has been the key driver of the overall loan growth and return on equities (ROEs) which the bank is delivering which is closer to 1.6-1.7 percent sort of ROEs, I think they are likely to stay. May be in the interims the provisions will remain higher if the banks has guided for a higher level of slippages in the next quarter also. However, they will tend to normalise from the second half of 2017. Once that begins to happen we need to look beyond as to what is going to happen in the next two quarters. So, the bank is currently around 1.2 times adjusted which looks pretty attractive to us given the sort of ROEs and return on assets (ROAs) that we are likely to see. In terms of digitisation and in terms of retail loan growth bank is doing very well. It has gained share in current account saving account (CASA) mix with liability franchise particularly very strong now with 45 percent sort of CASA. So, all these positive things gets ignored when one look at only the corporate strength. Anuj: What is you price target do you think the stock runs the risk of going back and testing the previous lows? Jariwala: It is very difficult to say that whether the previous lows will be broken or will be tested or something like that. I think that they are lot of hidden NPAs in the balance sheet that slowly will get translated into your profit and loss account. Latha: Give me two numbers book value for this year, book value for next year? A: If you look at core book value the stock is currently probably trading at 1.5 times FY16 book value and 1.3 times FY17 book value. Book value for this year is around Rs 140 odd and for the next year is around Rs 160.