Analysts back ICICI Bank even as provisions rise manifold

Surpassing estimates, ICICI Bank reported standalone net profit of Rs 3102.27 crore  for second quarter ended September 30, 2016, registering growth of 2.38% year-on-year (yoy) and 38.96% quarter-on-quarter (qoq). 

The provisions and contingencies stood at Rs 7082.69 crore, rising by  651.75% year-on-year (yoy) and 181.67% quarter-on-quarter (qoq). 

MB Mahesh, Nischint Chawathe and Abhijeet Sakhare, analysts at Kotak Institutional Equities said, “Despite a weak headline performance with stake sale driving operating profit growth, we like the results for the following: (1) watch-list is seeing greater share of resolution as compared to earlier fears of being impaired, (2) availability of contingency reserves, (3) solid growth in CASA/retail loans, and (4) healthy capital."

They added," Within retail growth, drivers were on expected lines with home loan growth of 19% yoy and car loans growth of 15% yoy. Unsecured personal and credit card loans grew by ~40% yoy. Growth here is driven by cross-sell to existing network. We do believe that the bank should be able to grow at 15-17% CAGR in the medium term."

On the liabilities front the performance of ICICI Bank was impressive by recording 17% yoy growth in deposit segment and 18% yoy in current account and savings account (CASA). Also the CASA ratio was marginally better at 45.7% on qoq basis. Retail deposits comprise about 76% of total deposits. 
 
Kotak said," We are convinced on the liability business of the bank and we see it sustaining at closer to current levels. We see this change as a sustainable advantage for the bank, which would allow the bank to do low-risk retail and corporate business without materially impacting return ratios while giving a strong foundation for growth."
 
Sumeet Kariwala, Anil Agarwal, Subramanian Iyer and Rahul Gupta of Morgan Stanley, in a report dated November 3, 2016 said that banks are going through NIM pressure due to lending rate cuts, lower interest rates and rising NPLs. 

The bank reported Gross NPL (non-performing loans) at 6.8% expanding by 90 bps while net NPL increase was lower, at 3.6%. 

For ICICI Bank, Kotak sees NIM to remain under pressure given the high slippages expected in remainder of FY2017.

The report added, “Kotak also likes the retail transition and low-risk corporate business that is being built today led by strong CASA. We see a gradual recovery in RoEs in the medium term.”

Overall Kotak said, “ We like the progress in many of the large-ticket loans and believe that with stronger tools from RBI and companies deleveraging their balance sheet through stake sale, there should be positive progress on resolutions, which should augur well for the bank.”