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Why the June quarter performance of ICICI bank may fail to cheer the street?

There are two key issues that could keep the investor interest towards the biggest private lender in check even as generally banking stocks have been performing well lately.

, ET Bureau|
Updated: Jul 27, 2017, 10.40 PM IST
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While the gross additions in NPAs (Rs 4, 976 crore) was average run-rate of additions in the last four quarters, slippages from restructured assets (Rs 1,476 crore) appears quite in line with the trend of the last one year.
While the gross additions in NPAs (Rs 4, 976 crore) was average run-rate of additions in the last four quarters, slippages from restructured assets (Rs 1,476 crore) appears quite in line with the trend of the last one year.
Even as the June quarter earnings of ICICI bank, managed to meet market expectations in terms of net earnings – profit after tax declined by 8% y-o-y to Rs 2049 crore in line with Bloomberg consensus estimates – the fine print of the performance indicates that the street may not yet warm up to the stock. Especially after the sharp gains of 24% observed since March quarter results when it announced a bonus issue, the stock now seems fairly valued at two times its FY18 expected book value.

There are two key issues that could keep the investor interest towards the biggest private lender in check even as generally banking stocks have been performing well lately.

On asset quality front, though the bad asset proportion has not deteriorated further – gross NPA ratio stood at 7.99% compared to 7.89% in the March quarter – the stickiness in the watchlist – lower rated stressed loans - pose a risk to the asset quality. During the June quarter while the bank only reported Rs 359 crore of slippages from the watchlist, the bank saw the list increase from Rs 19,039 crore at the end of March to Rs 20,358 crore due to addition of power sector related exposure due to rating downgrade post supreme court judgement on compensatory tariff.





While the gross additions in NPAs (Rs 4, 976 crore) was average run-rate of additions in the last four quarters, slippages from restructured assets (Rs 1,476 crore) appears quite in line with the trend of the last one year.

The slowdown in sequential net additions in gross NPA (Rs 596 crore compared to Rs 4,835 crore in the previous quarter) seem to confirm the management’s guidance that additions of bad assets in FY18 will be lower than that in FY17. However, the current size of the watchlist – 46% of the original quantum - could act as an overhang on the stock. In comparison, the outstanding watchlist of Axis Bank currently stands at 37% of its initial size. Given that nearly 80% of the watchlist still consists of sectors like power, mining and iron& steel, the probability of a sudden slippage from the list in the coming quarters cannot be ruled out.





Another concern is the slow-pace of growth reported in the asset base of the bank. Thanks to troubled portions of the corporate book and its international operations the total loan book of ICICI bank reported its slowest y-o-y growth of 3% in at least last three years. The management acknowledged that it is continuing to reduce its exposure to sectors that are stressed or have high concentration in the loan book eve as it is trying to increase its business towards higher rated corporates. While its corporate book reported its highest contraction of 3% in the last four quarters, the overseas portfolio contracted sharply by 25%.

Even as share of retail segment in the total book now stands at 53.3% compared to 46.4% a year ago, the traction (in terms of y-o-y growth for the quarter) in some of the key sub-segments like home loans, personal loans and vehicle loans that are responsible for two third of the retail book has come down in the last three quarters.

To be sure, on profitability front the bank has performed well with the operating profit reporting its smallest y-o-y contraction in three quarters even as the net interest income or core operating profit growth coming in at a modest 8.4% for the June quarter compared to last year. Going ahead while abating provisioning requirement may support the momentum in profit growth, the street may like to see a contraction in the watchlist size to get confidence on substantial EPS growth.

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