ICICI Bank’s robust underlying fundamentals were clouded recently. However, things seem to have finally stabilised for the company now. Most market participants and stock analysts believe that the bank is well-steered with strong growth potential.
On Jan 30, the lender reported a good third quarter (Oct-Dec) earnings performance which highlighted a 14% year-on-year rise in core operating profit to almost 57 billion rupees and a firm decline in additions to Gross NPA. Along with the results, the bank finally put behind the concerns over its corporate governance standards by taking a standard-setting stern action against its former managing director and chief executive for ineffectively dealing with conflict of interest and due disclosure or recusal requirements.
Resultantly, most brokerage houses, after taking into account future outlook and steadiness at the top, have raised the target prices for the shares of ICICI Bank.
October-December
For the quarter ended December, the Mumbai-headquartered posted a total income of almost 202 billion rupees, a year-on-year rise of nearly 20%.
The balance-sheet cleaning efforts have started to show results, with the bank’s asset quality taking a turn for the better. Its gross bad loan additions dropped to the lowest in the last 14 quarters and the net NPA ratio was the best in the previous 12 quarters.
ICICI Bank posted a 12% year-on-year growth in overall advances, underpinned by a 14% growth in the domestic loan book. Its continued focus on retail lending has enabled ICICI Bank to grow its domestic loan book almost in-line with the industry growth, with retail assets expanding by 22% from a year ago.
The bank’s net interest margin (NIM) for the December quarter improved to 3.40% from 3.33% in the previous quarter. Its NIM for the domestic book stood at 3.72%.
Termination for cause
While few have raised qualms about ICICI Bank’s operational performance, it was surrounded by controversies pertaining to its former head and misconduct allegations on her, through 2018.
For ten months, amid intensive media scrutiny, the bank stood behind the faith it put behind a loyal employee of over three decades, even as it commissioned a fresh inquiry on the allegations in March last year.
The faith of the Bank’s board was backed by a previous independent inquiry by one of the leading law firms of the country, Cyril Amarchand Mangaldas. In its report, the firm had given a clean chit to the then-MD when these allegations first emerged in 2016.
Despite the media running wild with reports on the contrary, the bank’s board’s decision was not defensive, but a prudent one. The bank continued to rely on the aforementioned report and when new information came to light and it diligently asked renowned Justice BN Srikrishna to look into to the issue.
However, the so-called “backing” was only till the single-member Justice BN Srikrishna committee turned in its report, which found the former CEO guilty of violating the lender’s code of conduct and said that she showed “lack of diligence” in dealing with due disclosure and recusal requirements.
As a result, the bank has not only sacked her, it also decided to reclaim back all bonuses given to her since 2009 when she took charge of the top post. In a strongly-worded release, the bank’s board said that it has decided to treat the separation as a ‘termination for cause’.”
“I feel in corporate India it is first of its case. A stern action has been taken. I always believe this act as a deterrent or warning to others that things shouldn’t be taken lightly,” JN Gupta, former SEBI Executive Director and Managing Director of Stakeholders Empowerment Services, was quoted saying in a report on ICICI Bank’s action on the findings.
While some may fret over the board’s decision to not to put media whimsies over due diligence, its discretion towards due process is a commendable example of upholding governance standards in times of duress.
Moving forward
Now under stable stewardship, the bank has seen a progressive outlook. De-risking of its asset book continues at a brisk pace, while slippages have continued their downward trend. The bank is building an enviable liability franchise and driving the digitisation of banking in India. In fact, digital channels like internet, mobile banking and others account for over 85% of the savings account transactions in the bank now.
Most brokerages have said that past issues are unlikely to have an impact on the bank’s operations in the future. They also expect the bank’s credit cost to decline sharply in the coming quarters and the strong CASA (current account saving account) franchise to aid market-share gains in loans.
The strong outlook for ICICI Bank has led several global brokerage firms such as CLSA, Jefferies, Morgan Stanley and Macquarie to raise their respective target price for its share to 450-510 rupees. This translates an upside potential of 20-37% from the current levels.
“ICICI Bank remains one of our top picks in the financial sector,” CLSA said in a post-earnings note.
Brokerage Morgan Stanley, which has an ‘overweight’ rating on the stock, sees the ongoing improvement in the lender’s asset quality to continue over the next few quarters and expects a stronger performance from the stock in 2019. According to brokerage, ICICI Bank’s total loan growth may touch 17% by 2021 and operational performance can improve further “as underlying revenue momentum picks up.”
Even domestic brokerages have turned upbeat on the stock, with brokerage Reliance Securities anticipating “a sustained improvement in operating metrics led by dwindling headwinds…”
The fact that the bank’s stock has largely outperformed the benchmark Nifty 50 index and the banking index over the past few months is a testament to the fact that market players concur with the analysts’ view on the bank.
Going ahead, all signs seem to point that all stakeholders can keep counting on one of the systematically important banks of the nation, as long as it stays true to its mission of delivering of returns and world-class financial services.
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