ICICI Bank didn’t throw any nasty surprises on asset quality for the September quarter but the outlook is far from sanguine for investors. The private sector lender reported a 29% fall in its net profit but that can be blamed on the one-time charge of ₹2,920 crore due to tax adjustment.
Indeed, net profit should be ignored and the bank should be lauded for taking a prudent step to adjust its deferred tax assets at one shot. From here on, ICICI Bank can reap the benefits of a lower tax rate.
Investors should be pleased that core income growth was maintained at 26% and domestic loan book managed to expand 16.4% despite the protracted slowdown.
Of course, like all banks, ICICI Bank too chased the retail customer for growth and its personal loans were the fastest growing segment in its retail portfolio. Since the bank is able to lend at reasonable speed, its future earnings are not under threat.
Here comes the asset quality issue. For the September quarter, bad loans formed just 6.4% of ICICI Bank’s loan book on a gross basis, a sharp fall from 8.5% a year ago. Adequate provisions ensured that the net bad loan ratio fell to a greater extent.
But stress is around the corner again and the malaise from non-bank finance companies hasn’t abated. ICICI Bank’s exposure to non-banks has increased ever since the liquidity crunch hit a year ago.
The lender has even bought loans from troubled non-bank finance companies (NBFC) through securitisation. However, the management has indicated that it is not worried over its NBFC exposure.
Telecom is another emerging stress segment especially after the Supreme Court ordered operators to pay up licence fee. The burden on telcos is likely to affect their repayment capacity in the short-term.
Besides all this, the ongoing resolution of several large bad assets in insolvency courts will continue to weigh on the bank’s recoveries.
Its watchlist of stressed loans has marginally increased.
Considering these, analysts are less sanguine about a fall in credit costs. “We have maintained credit costs at 1.5% vs management guidance of 1.3% which includes certain IBC (Insolvency and Bankruptcy Code) recoveries,” analysts with Jefferies India Pvt Ltd wrote in a note.
To be sure, ICICI Bank has come a long way on asset quality over the last two years. Its bad loan ratios have improved markedly and provisions have been made prudently over time. But as newer stress emerges, the lender could find itself in a tough battle and investors would do well to be cautious.
After the 20% rise since corporate tax cut, the stock trades at a multiple of nearly three times its estimated book value for FY21.