After over a decade, ICICI Bank’s stock seems to be charting its way back on the league tables from a valuations standpoint. Trading at about 2.3x one-year forward price to book value, the core or standalone asking price of ICICI Bank seems to have overtaken HDFC Bank (2x FY25 price-to-book) by a small margin. In fact, reacting to the results announced on Saturday (aftermarket hours), ICICI Bank stock touched a 52-week high of ₹1,067.40 a share on Monday, and closed the day with gains of 2.1 per cent in the bourses.

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Interestingly, it was the only stock in the BSE Bankex index, which closed in the green on Monday, while the index was down over twoper cent in trade. Meanwhile, it is pertinent to note that at a consolidated level, valuations of ICICI Bank and HDFC Bank are around 2.5x one-year forward multiple, though convergence in valuations is also happening after over a decade.

An overall improvement in earnings profile as evidenced in the recent Q3 results is aiding ICICI Bank. With the visibility of financials a tad when compared to HDFC Bank, the former is anticipated to maintain this valuation gap in the near term. What’s working in ICICI Bank’s favour is the sustained improvement in quality of loan growth, asset quality and return ratios .

That said, considering the macro environment, which is currently a bit tricky to second guess, it may be prudent to keep a tab on a few important aspects of the bank’s financials.

Loan composition

Retail loans account for 54 per cent of the bank’s loan book. For many quarters in a row, credit cards and personal loans — accounting for 24.8 per cent of the bank’s retail loans or over 13 per cent of total loan book — have been growing faster than other segments. This has helped the bank comfortably keep its net interest margin or NIM (measure of profitability) stay upwards of fourper cent. In Q3, NIM fell to 4.4 per cent, down 22 basis points year-on-year. The fall may have been sharper had the loan growth not been aided by the unsecured segments.

While the bank increased it’s interest rates in some of these categories to factor in for higher risk weights, seen against the continued cautious commentary from the Reserve Bank of India and increasing retail slippages, how the bank’s loan composition evolves in the near term needs to be watched.

To put things in perspective, retail slippages increased from ₹41.59 billion in Q3 FY23 to ₹54.82 billion in Q3 FY24, up 31.8 per cent year-on-year, marking the highest jump in slippages in the last four quarters. Even excluding ₹6.17 billion of slippages which accrued from Kisan credit card portfolio, slippages in the retail space rose to ₹48.66 billion, indicating a jump of about 17 per cent year-on-year. That said, cushioned by growth, retail NPAs have been range bound at 1.5–1.7 per cent, with Q3 retail gross NPA at 1.65 per cent.

Profitability

For a bank of ICICI’s size and loan book diversity, NIM at over 4 per cent is appreciable, and this is one of the key factors that has propelled rerating in valuations since 2020.

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However, if the bank were to curtail or slow down growth in its unsecured loan book, NIM would come under pressure. Unlike some of its peers such as Axis Bank, IndusInd Bank or RBL Bank, which are cushioned by a seasoned microfinance book capable of compensating for a pull-back in other unsecured loans categories, ICICI Bank doesn’t have that buffer. For now, it’s a tight rope walk on this front and NIM compression is a risk which the stock isn’t factoring.

Capital position

At 14.61 per cent capital adequacy ratio, ICICI Bank is well placed. However, compared to 16.07 per cent capital adequacy ratio in Q2 FY24 and 18.34 per cent in FY23, the rate of capital consumption seems to be quite high.

Seen against HDFC Bank and Axis Bank’s capital adequacy ratios of 18.39 per cent and 16.63 per cent, respectively, that of ICICI Bank seems low. The bank raised ₹15,000 crore through qualified institutional placements in August 2020 which boosted its capital by about 190 bps. Given how capital has been consumed, it would be interesting to watch if a round of fund raise is 12 – 24 months round the corner.