It has been a dismal year for banking stocks, with private banks too feeling the heat of the corporate slowdown and the increasing stress in the banking system.
ICICI Bank’s stock has fallen by about 40 per cent over the past year, weighed down by worsening asset quality.
The bank’s higher exposure to troubled sectors such as power and infrastructure has led to increasing bad loans and slippages from the restructured book.
While the pain may continue for a few quarters, most of the concerns and uncertainty on the asset quality front seem to have been more than priced in.
At 1.2 times its one-year forward book, the leading private bank stock is trading far lower than its five-year historical average of 1.8 times.
Adequate capital
A gradual recovery in the economy over the next two years should ease the pressure on asset quality and drive earnings growth. ICICI Bank holds adequate capital to absorb additional stress, without impairing its pace of growth.
The bank is well capitalised with Tier I capital at about 12 per cent. The overseas subsidiaries too have excess capital (ICICI Bank UK at 15.6 per cent and ICICI Bank Canada at 23.7 per cent), giving the bank sufficient capital cushion.
Moreover, the bank’s core performance has been healthy and a domestic loan growth of 20 per cent year-on-year as of December 2015 has been driven by strong growth of 24 per cent in retail loans.
This is far higher than the 8-9 per cent growth in loans for the overall banking system during the period.
The bank has also scored well on other parameters and its margin performance has been stable and healthy.
The net interest margin (NIM) has remained flat at 3.5 per cent over the last year despite pressure on lending rates. This is thanks to the fall in cost of deposits over the past year.
While the core performance is strong, the bank continues to add to its stressed book, which is an overhang on the stock.
During the December quarter, the bank added ₹6,544 crore to the bad loan book, a sharp rise from Rs.2,200 crore seen during the same period last year.
But more than 60 per cent of the additional slippages during the quarter have been on account of the recognition of bad loans, according to the RBI’s assessment of the stressed accounts. The difficult times may continue in the March quarter as well.
The substantial increase in slippages from restructured assets has also been a concern in recent quarters.
While asset quality may remain a concern, strong core performance and unlocking of value in its insurance subsidiaries, is a positive.
Unlocking value
The Insurance Laws (Amendment) Bill 2015, passed last year, hiked the limit for FDI in insurance from 26 per cent to 49 per cent, triggering several deals. Importantly, these deals happened at a 20-30 per cent higher value than earlier estimated.
Two such deals happened in ICICI Bank’s insurance subsidiaries. The bank’s 6 per cent stake sale in ICICI Prudential Life Insurance Company valued the insurance arm at Rs.32,500 crore, 25 per cent higher than the earlier estimated value for the business.
ICICI Bank’s 9 per cent stake sale in the general insurance business valued the insurance company at Rs.17,225 crore, or over 40 per cent of the valuation estimated earlier.
The bank's standalone business can be valued at Rs.208 per share based on 1.6 times the 2016-17 book. The insurance and asset management subsidiaries add about 20 per cent to the implied stock value (Rs.272 per share).
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