ICICI Bank on the Path Paved of Pains

Only the performance of public sector banks has not been overburdened by worsening asset quality. A few large private sector banks have felt the heat of rising bad loans as well over the last few quarters. ICICI Bank and Axis Bank, which have a comparatively higher exposure to distressed sectors such as power and iron and steel in comparison with its other private sector counterparts, have been moving in lock-step for the past year on the asset quality front.

The September quarter results have been no different. Both the banks witnessed a considerable rise in bad loans, with a chunk of fresh slippages coming from the so-called ‘watch-list’ of stressed corporate accounts that were created by them in the March quarter.

 

Horses Driving the Misery Carriage:

While the watch list has diminished for both over the last two quarters, the problem of bad loans appears to be far from over, the odds of default from these accounts still being high. ICICI Bank’s slower loan growth has only added to its misery, making the issue look a lot worse.

ICICI Bank noticed its gross non-performing assets (GNPAs) increase to 6.8 per cent of loans in the September quarter, from 5.8 per cent in June. A portion of the fresh slippages into NPAs has come from the watch-list, which encompasses the bank’s exposure to power, iron and steel, mining, cement and rigs.

The private lender had outstanding accounts of around Rs. 44,065 crores at the end of March 2016 under the watch list. This has now shriveled to Rs. 32,490 crores as of September. However, given that a part of the reduction amounting Rs. 9,100 crores in these accounts has ensued from slippages to NPAs. The bank might see more pain in the coming quarters from these stressed accounts.

Even Now, the assets-under-watch list is around 7 per cent of the bank’s total loans. For Axis Bank, the unresolved accounts under its watch-list are about 4 per cent of loans.

ICICI Bank has made a further provision of Rs. 3,588 crores during the September quarter. This has affected the net profit for the quarter, which has grown by a marginal 2 per cent over the same quarter last year. The management acknowledged that the discreet measure to create such provisions is on account of its exposures to certain sectors that continue to observe stress. This is indicative of the management’s vigilant outlook for the financial year FY17.

While on the asset quality front, both ICICI Bank and Axis Bank face analogous concerns, the latter at least has a better core performance to bank on.

While Axis Bank’s net interest income increased 11 per cent in the September quarter as compared to the same period last year, ICICI Bank’s net interest income was flat. Overall loan growth stood at 11 per cent for ICICI Bank, far lower than Axis Bank’s 18 per cent growth during the September quarter.

Both banks delivered strong growth in retail loans of 21-25 per cent during the September quarter. But a lower 8 per cent growth in corporate loans affected ICICI Bank’s performance. However, this is in line with the bank’s regulated approach to lending to the corporate sector, as was hinted in the beginning of this financial year.

The management will continue to provide only to high-rated corporates and focus on reducing the concentration risk in the portfolio. Hence, the growth in the corporate segment is expected to remain reticent for the remaining part of the financial year.

Another factor adding the misery to ICICI Bank is low rate of upgrades and recoveries. In the September quarter, upgrades and recoveries stood at Rs. 800 crore and have been alike in the previous quarters as well. In fact, ICICI Bank made upgrades and recoveries of just Rs 2,184 crore in the complete FY16. To sum up, as ICICI Bank is indemnifying for future pain by hiking provisions, investors, too, would do well to buy some protection.

 

The Bad Loans Provisioning Balloon:

In what could sound alarm bells in the already slothful banking industry, ICICI Bank Ltd on Monday reported an increase in the proportion of bad loans to perhaps the highest in 10 years.

While gross non-performing assets (GNPAs) more than doubled on the yearly basis from Rs. 15,858 crores as at Q2FY15 to Rs. 32,179 crores, provisions went up sharply to Rs. 7,082 crores in the second quarter, compared to Rs. 2,514 crores in the first and Rs. 942 crore in the year-ago period.

Also, the net interest income, which is defined as the difference between interest earned and interest expended, was was flat at Rs. 5,253 crores in the second quarter as against Rs. 5,251 crore last year.

Chanda Kochhar, Managing Director & CEO of ICICI Bank, refused to give any guidance on the percentage of loans included in the watch list that might slip into the ‘bad loan’ category.

The bank’s watch list of potentially distressed loans had slipped to about Rs. 32,500 crore from approximately Rs. 38,700 crores at the end of June.

Kochhar, referring to clients the bank considers below investment-grade, said on a conference call that they expect a significant further reduction in this portfolio in the next six to nine months.

 

Light at the End of Tunnel:

In absolute terms, slippages look high, but the good news is that 80 per cent of the slippages has come from the watch list and restructured book. The fact that slippages from the regular loan book have been controlled is a positive sign and a vital development for the quarter. Whilst the slippages and credit cost will remain high over the next few quarters, it seems that the bank will be able to clean up the book mostly and start looking at regular growth from 2HFY18.

Gains acquired from selling a part of its stake in its life insurance subsidiary and deferred tax adjustment aided ICICI Bank report a marginal increase in net profit at Rs. 3,102 crores in the July-September quarter. India’s largest private sector bank had posted a net profit of Rs. 3,030 crores in the year ago period.

All gratitude to the realization of a gain of Rs. 5,682 crores on selling 12.63 per cent in its life insurance subsidiary ICICI Prudential Life through an IPO, the bank’s non-interest income increased to Rs. 9,120 crores from Rs. 3,007 crores in the year-ago quarter.

The bank also got the advantage of higher deferred tax adjustment (DTA) of Rs. 1,247 crores, which helped pull up the profitability in the reporting quarter. The bank saw a DTA of Rs. 214 crore in the year-ago quarter.

GNPAs went up by Rs. 4,985 crore in the quarter under review. GNPAs, as a percentage of gross advances, surged to 6.82 per cent as at September-end 2016 from 3.77 per cent as at September-end 2015.

Against all odds, ICICI bank share price was trading at Rs. 279.90, up by 0.43% as compared to the 0.10% rise in the Benchmark Index Nifty at 11:54 AM on 8thNovember 2016.

Source  :   https://www.dynamiclevels.com/en/blog/icici-bank-on-the-path-paved-of-pains