State-run banks are seeing a slack in credit offtake, but ICICI Bank has bucked the trend, turning in a steady growth in its loan book, largely driven by retail sector advances and rising net interest margin. Within retail, unsecured personal and credit cards were the star performers and the bank doesn’t see any stress and further expects growth to remain steady.
This is despite the mild warnings from the Reserve Bank of India a few months ago when it hinted that there could be some underlying stress building up within the the retail market, particularly pertaining to unsecured loans.
In fact, there were signs of stress visible within ICICI books, but the bank maintained that the risk was within the manageable levels. For instance, in the June quarter, retail bad loans grew to 1.9 per cent of advances, up from 1.6 per cent a year before, while the provision cover has been steadily declining over the years and currently stands at 57.5 per cent. This is lower than the bank’s overall provision coverage ratio of 74.1 per cent.
Besides retail, agriculture too displayed signs of stress as slippages rose, and if the trend continues it could topple the bank’s steady progress. But the management reasoned that agri slippages are seasonally higher in both first and third quarter and was unlikely to blow up. The bank continues to maintain a cautious approach towards corporates and doesn’t have significant residual exposure to recent defaults such as DHFL, Essel Group or Reliance Communications.
The bank’s exposure to Jet Airways had already slipped to BB and below, according to Jefferies India. The brokerage expects steady improvement in core operating profit, while lower credit costs will help drive stand-alone return on equity to 16 per cent by FY21. For FY20, the bank’s credit costs are expected to be 1.1-1.3 per cent.
Meanwhile, improved earnings reinforce faith that the bank is gearing up for sustainable, prudent and profitable growth, according to Edelweiss Securities. Investors are buoyed by the bank’s 20 per cent core operating profit growth and and 23 per cent rise in core net interest income. “The change in strategy - granularity, de-risking, people involvement - will keep earnings quality steady, which would be progressively valued as markets recognise their sustainability,” noted Edelweiss.
It added that during the June quarter, the bank deployed a risk-calibrated credit growth of over 18 per cent with focus on granularity and pricing led by market share gains, unsecured retail build-up, and renewed small and medium-sized enterprises focus. “Respectable NIM at over 3.5 per cent and controlled costs and improved productivity. However, traction in fee income needs improvement,” it reasoned.
Net bad loans dipped below 1.8 per cent for the first time in 14 quarters, while provision coverage excluding technical write offs stood at 74 per cent, the best among its peers. Domestic advances grew 18 per cent Y-O-Y, while term deposits shot up 33 per cent. The missing link though is the fee income growth of 10 per cent, but analysts expect it to fare better in the coming quarters.
“We believe, the trend will sustain considering the better rating mix (A-rated and above loans at over 67 per cent), reduced concentration risk (exposure to top-20 borrowers is less than 12 per cent compared to 15 per cent in FY15), high coverage of 74 per cent,” it said.