I was keen to uncover the secret sauce behind ICICI Bank’s exceptional outperformance on loan growth, net interest margin (NIM) and return ratios, following Sandeep Bakshi’s ascent to the helm.

The answer lies in its unsecured and high yield loans. The book comprising personal loans, credit cards and loans against property (LAP) has grown at a heady average of 31.6 percent (YOY, every quarter) for the past 14 compared to average growth of 12.9 percent (YOY, every quarter) for the total loan book.

This has led to the share of the trio increasing from 9.38 percent in the second quarter of fiscal-ended March 2019 to 16.46 percent in the fourth quarter of fiscal-ended March 2022 (the period of Bakshi’s tenure) and resulted in the net interest margin (NIM) expanding by 67 basis points.

This begs the question: Is ICICI Bank back to chasing growth at the cost of higher risk?

Also Read | ICICI Bank aims to double SME loan book in two years: Executive director Anup Bagchi

The bank’s retail loan book was 58 percent of FY08 total loan book and went down to 49 percent in the next fiscal. At this time, a large part of the retail book was unsecured or high yielding products and this was reflected in the net NPA (non-performing assets) ratio moved from 1.49 percent in FY08 to 1.96 percent in FY09.

An examination of ICICI Bank’s risk-weighted assets reveals a significant improvement on the back of a decline in the corporate loan portfolio from 27.4 percent to 22.55 percent over the above indicated period (Q2FY19 to Q4FY22).

That said, while the situation looks good for now, a significant rise in the share of the high yield book could reflect in valuations down the line.

It’s noteworthy that HDFC bank has more exposure to the high yielding portfolio. However, its risk weight assets to loans ratio is below 100 percent or 400 bps below ICICI Bank, which indicates better safety.

The slippages in the retail loan book are elevated and in the fourth-quarter earnings conference call, the management said, “the gross NPA additions from the retail, rural and business banking portfolio was Rs 37.36 billion and from the corporate and SME portfolio was Rs 4.68 billion). Provision buffers have been increased (COVID-19 provision buffer increased to Rs7,450 cr versus Rs 6,425 cr in Q3) and this is a point of concern.”

Growing the high yield book at a pace far ahead of the industry raises the relative risk profile of the book. And this could lead to a lower valuation multiple being ascribed to the bank in the days to come.

#4QWithCNBCTV18 | @ICICIBank reports its Q4 Net Profit at ₹7,018.7 cr. Its Net Interest Income sees a mild miss at ₹12,604.6 cr & Q4 asset quality improves. The management speaks about the bank's performance & road ahead@kothariabhishek @_ritusingh https://t.co/IdNF0oRtsV

— CNBC-TV18 (@CNBCTV18News) April 23, 2022

(Edited by : Abhishek Jha)