ICICI Bank did not have any bad surprises in asset quality for the September quarter, but the outlook is far from optimistic for investors. The private sector lender recorded a 29% drop in net profit but this can be attributed to the one-time charge of ??2,920 crores due to a tax adjustment.

This is because the bottom line should be ignored and the bank should be commended for taking a prudent step to adjust its deferred tax assets all at once. From here, ICICI Bank benefit from a lower tax rate.

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Graphic by Satish Kumar / Mint

Investors should be happy that core income growth has held steady at 26% and that the domestic loan portfolio has managed to grow by 16.4% despite the prolonged slowdown.

Of course, like all banks, ICICI Bank also continued to grow its retail customers and its personal loans were the fastest growing segment of its retail portfolio. As the bank is able to lend at a reasonable rate, its future profits are not threatened.

Here is the question of asset quality. For the September quarter, bad debts represented just 6.4% of ICICI Bank’s loan portfolio on a gross basis, a sharp drop from 8.5% a year ago. Adequate provisions further reduced the net bad debt ratio.

But stress is once again around the corner, and the malaise of non-bank financial companies has not abated. ICICI Bank’s exposure to non-banks has increased since the liquidity crisis that hit a year ago.

The lender even bought loans from troubled non-bank financial corporations (NBFCs) through securitization. However, management has indicated that they are not worried about her exposure to the NBFC.

Telecommunications is another stressful segment emerging, especially after the Supreme Court ordered operators to pay license fees. The burden on telecommunications operators is likely to affect their ability to repay in the short term.

On top of all this, the ongoing resolution of several large questionable assets in insolvency courts will continue to weigh on the bank’s collections.

Its watchlist for stressed loans has increased slightly.

Given these elements, analysts are less optimistic about a drop in credit costs. “We have kept the cost of credit at 1.5% against a management forecast of 1.3% which includes some IBC (Insolvency and Bankruptcy Code) recoveries,” analysts at Jefferies India Pvt Ltd wrote in a note.

Certainly, ICICI Bank has come a long way in asset quality over the past two years. Its bad debt ratios have improved markedly and provisions have been established prudently over time. But as new tensions emerge, the lender could find itself in an uphill battle and investors would do well to be cautious.

After the 20% hike since the corporate tax cut, the stock is trading at a multiple of nearly three times its estimated book value for fiscal year 21.

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