ICICI Bank Ltd ticked all the boxes in the June quarter when it came to profitability. While analysts have highlighted this as a key reason for valuation boost, investors seem to wonder whether the bank’s bet on retail would pay off or bring additional heartache in the wake of the pandemic.
Retail loans account for 60% of the bank’s portfolio and were the biggest contributor towards fresh slippages in the June quarter. Retail slippages totaled Rs6,773 crore, 94% of slippages. This comes even as retail loans showed a healthy 20% year-on-year growth.
To be sure, ICICI Bank is perhaps more aggressive in retail than most of its peers at a time when the potential stress is expected to increase. However, the lender is not rash. The bank’s loan book was flat on a sequential basis which means it chose to not lend during the second wave. Further, the bank has tightened its provisioning policy which resulted in setting aside an additional Rs1,127.15 crore mostly towards retail loans. Analysts note that restructured loans remain under check and that much of the retail slippages can be attributed to the disruptions caused by the second wave. “We are also comforted by stable trends in unsecured personal/ credit cards, business banking/ SME and corporate segment,” wrote those at Jefferies India Pvt Ltd in a note.
Be that as it may, the slippages from the gold loan portfolio should not be ignored. Also, ICICI Bank’s loans to small businesses, the most vulnerable amid the pandemic, have grown sharply during the last year. The lender’s handling of this segment would determine future stress. What will move the needle on asset quality is how the retail segment behaves. The management refrained from giving clear guidance on future stress but said retail books are safe.
For now, the trend in profitability for the coming quarters looks healthy. A provisioning coverage ratio of 78% gives confidence to analysts that incremental provisioning would be manageable. Despite the low base effect, the 22.7% growth in core operating profit gave one more reason for analysts to stick with a buy rating on the stock. Shares have gained 15% since April, outperforming the broader market and narrowing the valuation gap with peer HDFC Bank. The bank needs to demonstrate a clear trend of improving asset quality to bridge this valuation gap with its peer HDFC Bank.