For ICICI Bank , that has been under pressure over the past few years owing to its bad loan troubles, the latest June quarter result has been comforting on several counts. A strong growth in the bank’s core net interest income, notable fall in slippages, healthy capital position and sound provision cover — are key positives in the June quarter performance.

Also read:ICICI Bank posts Rs 1,908 cr profit in Q1 on growth in interest income

Yet, a large BB and below rated corporate and SME book, low NPA recoveries, and weak return ratios, suggest that the bank is still some way from sustainable recovery. Steadfast focus on loan quality, maintaining high provision cover, strong recoveries and improving return ratios will be critical for the stock to re-rate significantly.

Positives first

In the latest June quarter, Gross Non-Performing Assets (GNPA) stood at ₹45,763 crore down from ₹46,291 crore in the March quarter and ₹53,465 crore in the same quarter last year.

GNPA as a per cent of loans has hence fallen from 6.7 per cent in the March quarter to 6.49 per cent in the latest June quarter. Slippages too have fallen notably in the June quarter to ₹2,779 crore from ₹3,547 crore in the March quarter.

On the core performance front, the bank’s net interest income (NII) has grown by a strong 27 per cent YoY in the June quarter. While this includes ₹184 crore of interest on income tax refund, even excluding this impact, the growth in NII has been healthy at a little over 23 per cent. Growth in domestic loans was a strong 18 per cent in the June quarter, led by 22 per cent in retail loans. SME loans grew by 23 per cent too, but on a low base. Corporate loans grew by a modest 7 per cent.

A conscious decision to de-risk the loan portfolio, has been paying off for the bank over the past two to three years. From about 20 per cent in FY16, ICICI Bank’s exposure to BB and below rated loans has come down significantly to 3.5 per cent in the June quarter.

In terms of segments, ICICI Bank has significantly increased its focus on retail loans. From 46 per cent in FY16, retail constituted 61 per cent of loans in the June quarter. During this period, the bank’s exposure to corporate segment has fallen from 27 per cent to 23.6 per cent. Significant consolidation of the bank’s international loan book has also helped de-risk the portfolio.

Needs watching

But the growth in retail loans in recent quarters has been led by unsecured segments such as personal loans and credit cards. In the latest June quarter too, the two segments grew by a robust 54 per cent and 33 per cent respectively. While the management has stated that the credit quality of these segments continue to remain stable, risk in the portfolio will need a watch.

In the June-quarter, the additions to bad loans was led by the retail segment (₹1,511 crore of slippages), which included ₹452 crore slippages from the kisan credit card portfolio.

On the corporate side, while slippages in the June-quarter were low at ₹1,268 crore (₹2,724 crore in the March-quarter), risks persist. The BB and below rated book for ICICI Bank is still large.

As of June, it stood at ₹15,355 crore, and further slippages from this book in the coming quarters can weigh on the bank’s performance.

The bank’s exposure to the power sector stood at ₹39,104 crore in the June quarter, of which a little over ₹11,000 crore are classified as NPA or form part of BB and below rated book. Given the persisting challenges in the power sector, ICICI Bank’s exposure to this segment would need monitoring.

A strong core performance and profitability will be imperative to tide over interim shocks in asset quality. While the bank’s profitability has been healthy in the June-quarter, the bank’s return ratios are still muted.

Until FY15, return on equity (ROE) and return on assets (ROA) were in the 12-14 per cent and 1.6-1.8 per cent range respectively. The bank’s asset quality woes have dampened earnings, leading to sharp fall in return ratios over the past two to three years.

ROE stood at a muted 3.2 per cent in FY19, while ROA was a low 0.39 per cent. In the latest June-quarter, ROA has inched up substantially to 0.81 per cent (annualised) and ROE to 7 per cent. However, this still remains much lower than the bank’s return ratios in the past, indicating that a sustainable recovery is still some way.

As such the bank’s net interest margin (NIM) has remained healthy through FY19 and in the June quarter, thanks to high yield on advances. Despite the 75 bps cut in RBI’s repo rate so far this year, ICICI Bank had only lowered its benchmark lending rate, MCLR, by 5 bps until June.

Effective July it has cut its MCLR by 10 bps. This could add pressure on NIMs in the coming quarters.

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