ICICI Financial institution: Stronger, agile and justifying valuations

Amidst the huge promoting by overseas institutional traders in banks inventory for a great half of the present fiscal, two names which have considerably bucked the development are HDFC Financial institution and ICICI Financial institution. The latter stands out for its capacity to aggressively seize some market share off HDFC Financial institution when regulatory curbs had been imposed on its enterprise, and considerably clear up its books – forward and throughout the pandemic.

At 3x FY23 price-to-book, valuations have zoomed in comparison with the historic common of 1.7x. Nonetheless, previous quantity must be seen within the context of the troubled interval between FY16 – FY20 when an enormous portion of its legacy company e book needed to written off following the asset high quality evaluate and the financial institution’s inside management points. Now, these behind and underwriting requirements considerably bumped up, valuations seem justified given the expansion potential.

Qualitative enchancment

One of many placing features about ICICI Financial institution which makes it a ‘consensus purchase’ amongst banking shares is the way in which it has approached the mountainous dangerous loans. From Rs 54,063 crore of non-performing belongings (NPA) in FY18, the quantity has fallen to Rs 37,053 crore in December quarter of FY22 (Q3 FY22; see desk). At 0.85 per cent internet NPA ratio (gross NPA much less provisions, write offs and recoveries) in Q3 FY22, that is the bottom stage of dud loans the financial institution has maintained for nearly a decade.

Actually, having bettered the Road’s expectation quarter after quarter on NPA entrance, ought to FY23’s provisioning value fall beneath Rs 10,450 crore as per analyst estimates for FY23 (Rs 7,472 crore for 9 months of FY22 as towards Bloomberg estimates of Rs 10277 crore), there may be ample room for rerating by way of earnings and profitability.

The opposite beneficial facet is the steadily falling share of weak loans (BBB and beneath rated accounts) within the final three years (see desk). What this means is that ought to there be one other spherical of asset high quality points on this portfolio, ICICI Financial institution could also be much less weak with 71 per cent of its company loans to effectively rated entities (A- and above). Total, the market notion of ICICI Financial institution has undergone affordable enchancment within the final 4 years, because of its portfolio composition and method to enterprise seeing a sea change.

Dissecting the enterprise

From being referred to as an aggressive participant available in the market, ICICI Financial institution has launched into is a cautiously aggressive progress method. By that it means, the financial institution won’t chase a sure charge of progress or sure portfolios of enterprise however will take a look at alternatives which match its danger framework.

As an example, the final three years supplied a great potential to develop on the retail facet of enterprise and the financial institution monetised the identical. Right this moment, at 61 per cent retail loans, the retail focus is among the many highest inside prime 5 non-public banks, beating that of even HDFC Financial institution, which till FY20 was seen as the most important retail financial institution within the nation.

The granularity of ICICI Financial institution’s retail portfolio additionally gives consolation (see desk). On a sustained foundation, the financial institution has drawn almost half its retail e book from the house mortgage and this development continued until the Q3 FY22. That mentioned, whereas the financial institution’s share of secured loans stays increased compared to friends to lower than 50 per cent, traders have to be conscious that composition of dangerous unsecured merchandise – private loans and bank cards which is steadily inching up – at 17 per cent of retail loans in Q3 FY22 as towards 15 per cent a year-ago. The financial institution’s retail NPA at 3.04 per cent in FY21 was fairly unnerving. A lot of it accrued from the unsecured e book. Come FY22, the began offering NPAs of the retail and enterprise banking segments (mixed) which got here at 2.43 per cent in Q3 FY22 as towards 3.26 per cent 1 / 4 in the past. With 1.2% of the mortgage e book restructured and retail loans accounting for 68 per cent of restructured accounts, the financial institution time until FY24 to regularise its retail e book. Whereas increased progress is padding up the ache, if the economic system, particularly for the salaried class, doesn’t bounce again rapidly, ICICI Financial institution’s asset high quality might be in a decent spot as soon as once more.

Nonetheless, the nice half is that barring unsecured retail, the probably ache from small and medium enterprise loans (SME loans) and company portfolio might be muted within the near-term. The financial institution has contained the share of SME loans at 4.4 per cent, although the expansion within the portfolio has been over 30 per cent until Q3 FY22. Share of its company e book too has been steadily maintained 24 – 25 per cent which positions the financial institution advantageously to seize a pick-up in non-public capex or company mortgage cycle.

Total, mortgage e book composition stays a beneficial one and sooner adoption of expertise, in sourcing high-yielding retail loans akin to private loans and bank cards, and SME and enterprise loans has led to an enchancment in profitability or internet curiosity margin to three.95 per cent in Q3 FY22 from 3.63 per cent in FY21.

Going forward, as retail mortgage progress might normalise and stay a money cow for the Financial institution, thus guaranteeing that upward development for NIMs is maintained. However the improvised company portfolio has the potential so as to add the alpha to its progress and earnings potential.

Dangers to issue

Operationally, unsecured retail loans pose a problem, which can also be the case with most non-public banks. The opposite danger is with respect to its management.

A lot of the transitioned at ICICI Financial institution has occurred beneath Sandeep Bakshi, an old-timer who helmed ICICI Prudential Life Insurance coverage and was introduced again to move the financial institution in October 2018. Bakshi’s time period will finish in October 2023. Whereas he’s eligible for one more time period, RBI’s choices are tough to second-guess, thus leaving room for management associated uncertainties.

Printed on

February 26, 2022