In private lenders such as ICICI Bank and Axis Bank, key concerns for investors have hung around asset quality – whether the NPA recognition cycle is bottoming out, or if there are still large slippages lurking around the corner.

ICICI Bank’s performance in the latest September quarter offers some respite to investors, who have been wrestling with the bank’s lacklustre performance for three years.

A gradual pick-up in loan growth, decent growth in core net interest income, and moderation in slippages are key positives in ICICI Bank’s September quarter performance, and this should lend comfort to investors.

That said, slippages are still above the levels seen prior to the December 2015 quarter, when bad loans started to rise sharply. Further moderation in slippages, sustainability of pick-up in loan growth, and the RBI’s divergence report on bad loans pertaining to FY18, will remain key factors to watch out for in the coming quarters. A significant re-rating in valuation will be unlikely in the near term, until there is more clarity on these trends and the bank’s earnings visibility.

Slippages down

ICICI Bank had reported sharp slippages of ₹15,737 crore in the March quarter. A chunk of it was due to the RBI’s new framework for stressed assets, which, in effect, did away with all the old restructuring schemes. Gross slippages in the June quarter remained elevated at about ₹4,000 crore.

While the slippages have moderated notably to ₹3,117 crore in the September quarter, they are still above the bank’s quarterly additions to bad loans of ₹1,600-2,200 crore until the December 2015 quarter when the slippages first shot up.

Hence, it may still be difficult to gauge whether the bank’s NPA recognition cycle has bottomed out. Importantly, the RBI’s annual risk-based assessment for FY18 is still awaited; any sharp divergence reported by the bank could be a setback.

Also, the bank’s watchlist (stressed assets pool) is still around ₹3,200 crore, which could slip into NPAs in the coming quarters.

Core performance

While asset-quality trends still need watching, on the core performance front, the bank has witnessed a notable improvement. From single-digit last year, the bank’s credit growth has seen a steady rise over the past two to three quarters, thanks to strong show in the retail segment. In the latest September quarter, the bank’s credit grew by about 13 per cent y-o-y, driven by a 20 per cent growth in retail loans.

However, the robust pace of growth in unsecured loans (though a lower share of the total retail loan portfolio) may need some watching. The bank’s unsecured loans have grown by a robust 42 per cent y-o-y in the September quarter, led by personal loans and credit cards.

Nonetheless, the bank’s 12 per cent growth in net interest income is an improvement over the 9 per cent growth in the June quarter, and 1 per cent growth in the March quarter. How well the bank is able to sustain this improvement in core performance will be critical for earnings.

That said, performance on the asset-quality front will remain the key driver for earnings and valuations for the bank in the coming quarters.

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