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ICICI Bank Q4 slippages increase and earnings moderate, can it withstand storm COVID-19?

ICICI banks Q4 was marked by a rise in slippages and moderating profit. The bank posted a net profit of 1,221 crore rupees in the fourth quarter of Fy20. The bottom line was adversely impacted by COVID-19 related provisions of over 2,700 crore rupees. ICICI Bank has been a tough stock to navigate for investors now for almost a decade following the global financial crisis in 2008. It materially lacks the stock price performance of its peers among the private banks.

Now ICICI Bank shell finally broke the shuttle’s in 2018 with a change in the bank’s management and has been significantly outperforming in the peer group since. Then now just when they actually thought the bank had emerged from the Lost Decade it shares have corrected but over 35%. From its 52-week high levels following the market meltdown after the outbreak of the coronavirus pandemic.

The bank also enjoys very strong fundamentals currently. If you look at the gross non-performing assets or the GNP s they have declined from a peak of 8.8% in FY18 to 53% at the end of March 2020. At the same time, the bank substantially raised its Provision Coverage Ratio or PCR which stood at 86.8% at the end of March.

Among the highest in the industry and hence the net NPAs have also improved to 1.41%. The bank has continued to improve its retail franchise both assets and liabilities as well. Consequently, ICICI bank balance sheet is now comparable to the best in class with its CACA, low-cost, current and savings deposits at around 42% of the deposits and retail loans at 63% of the total loans.

The ICICI Bank slippage is to non-performing assets increased as two corporate accounts namely Singapore-based Oil Company and also middle based Healthcare Company. These two companies were classified as GNP.

However, the private lender reported a strong overall performance with core pre-provision operating performance operating profit actually increasing by 8% year-on-year, driven by healthy loan growth and also the better margins.

The management had earlier articulated its strategy to deliver consolidated ROE or the return on equity of 15%. While improving net NPA to 1.5% and maintaining provisional coverage of above 70% by June 2020. Now while this is heartening to see that the bank has already delivered on the asset quality and on the provision targets.

The return targets definitely and obviously wouldn’t be met because of the uncertainty induced by the pandemic. Now with 30% of the bank’s total loans under moratorium. The future provisions will only rise, but healthy revenue growth led by reasonable known growth along with the low cost of funds. As well as the buffer of high provisions as well they will place ICICI Bank relative to the peers even if credit cost escalates over the next two to three quarters.

Banks management refrained from giving any sort of guidance as of now the pandemic induced uncertainty has really pushed down the stock’s valuation to a distressed level. Precisely for this reason, investors should keep ICICI Bank on their radar.

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