NPA surge apart, ICICI’s future may be less turbulent

ET Intelligence Group: With corporate lending in doldrums amid ever deteriorating asset quality, will retail banking provide the much needed succour to ICICI Bank? Investors would be eagerly seeking an answer to this daunting question as the country’s second-largest private sector lender reported a sharp increase in addition to the gross nonperforming assets (GNPA) or fresh slippages for the March 2018 quarter.

Though on expected lines, the bank reported Rs 15,737 crore of slippages for the March quarter, much higher than Rs 14,029 crore reported in the previous three quarters put together. Of this, Rs 9,968 crore were earlier classified as standard loans but had to be reclassified as bad loans in the March quarter after the RBI revised the framework for stressed assets resolution in February 2018.

This catapulted the GNPA as a percentage of total advances to 8.84 per cent, an increase of 95 basis points (bps; 100 bps is one percentage point) from the year-ago quarter. However, to the bank’s credit, the proportion of bad loans with due provisions rose sharply to 60.5 per cent in the fourth quarter from 53.6 per cent a year ago. Due to this, the net non-performing assets (NNPA) ratio fell by 12 bps year-onyear to 4.77 per cent for the March quarter.

While the NPAs emanating from the past lending decisions may continue to haunt the bank for a while, the future looks less turbulent as the share of retail loans, which by their nature tend to show lesser delinquencies than corporate borrowings, continues to increase. In the March quarter, retail loans increased by 21 per cent and formed 57 per cent of total advances.

What’s assuring is that the retail segment seems to be the major focus in the medium term as the bank targets to increase its share to 60 per cent by FY20. In addition, corporate delinquencies may also recede given that the exposure to substandard loans has reduced significantly to Rs 4,728 crore in the March 2018 quarter, from Rs 19,062 crore in the December 2018 quarter and from Rs 44,065 crore a year ago. By FY20, the bank expects to reduce NNPA to 1.5 per cent by increasing the provisioning ratio to 70 per cent.

At Monday’s closing price of Rs 289.4, the bank’s stock was at a trailing price-book (P/B) of 1.8. This is at a discount to the P/B of 2.2 for Axis Bank, which last week reported significant slippages, and to the P/B of 3-5 for some of the retail-focused banks with better asset quality. In the medium term, the valuation gap may narrow considering ICICI Bank’s strong balance sheet and growth in the core business driven by the retail portfolio.