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Asset quality clouds ICICI Bank outlook

In the March quarter, the bank?s restructured loan book is set to get burdened by an additional Rs 1,300 cr

Sunaina Vasudev  |  Mumbai 

After rising 38 per cent in 2012 so far, ICICI Bank is at an interesting position currently. On the one hand, the market is clearly expecting an improving macro environment and an interest rate cut. This will play very nicely for the Mumbai-headquartered bank which has a comfortable capital cushion and is poised for strong growth when the cycle turns.

On the other hand is the guidance for at least Rs 1,300 crore additions to its restructured loan book in the March 2012 quarter from the exposure to two accounts (GTL and 3i) over the Rs 880 crore disclosed in an analysts call on January 31. This was nearly half of the total restructuring done in the first nine months of 2011-12, which was about Rs 1,780 crore (0.7 per cent of total advances), say analysts. The total restructured portfolio since FY09 is Rs 9,280 crore (about 4 per cent of total loans).

sees a 4-7 per cent impact on net profits for FY12 so far from a potential 15-25 per cent net present value loss on this restructured book. The bank’s restructured labelling doesn’t include those loans which service obligations satisfactorily under the restructured terms; so the additions could suggest a possible ‘worsening of stressed asset trends’, according to analysts at This is even as the bank reported an improvement in in the December 2011 quarter with an actual reduction in absolute gross non-performing assets or (3 per cent sequentially and 5 per cent year-on-year). It is significant when compared to a simultaneous increase in reported by and HDFC Bank, 10 and 7 per cent sequentially, respectively.

The outperformance of the stock versus the broader market and some of its peers factors in most of the expected improvements, say analysts at More so, macro headwinds haven’t eased, given that many of the country’s core sectors are seeking government support in some form or the other. While it may or may not result in addition to the sectors’ woes, some experts also suggest that the hope of a rate cut may not materialise soon given the elevated crude oil prices.

At Rs 943, the stock is trading at 1.7 times the FY13 book value per share estimates — a significant although expected discount to (P/BV of 3.5 times). Waiting for definite improvements in the macro environment would be a prudent way to play the stock in the current scenario in the face of limited clarity on global and domestic macro risks.

Operationally steady
Operationally, business was on a steady keel last quarter after its prolonged consolidation earlier. Advances growth was largely boosted by growth in large corporates and SME loans. International loans grew 38 per cent year-on-year — largely due to rupee depreciation, adjusting for which actual loan book growth was 17 per cent. Emkay Global Research flagged the declining retail loan proportion which slipped to 33.5 per cent of total book (450 basis points lower year-on-year), which was significant as other private banking peers have focused on growing this segment. However, retail disbursals continued to be strong and higher repayments led to the subdued growth numbers, according to

In Rs crore Q3FY12 Q-o-Q (%) Y-o-Y(%)
Net interest Income 2,712 8.2 17.3
Non-interest income 1,892 8.8 8.2
Pre-provision operating profit 2,687 14.2 14.7
Provisions -341 7.0 -26.5
Net profit 1,728 15.0 20.3
Business parameters
Loans (Rs cr) 246,157 5.2 19.1
Deposits (Rs cr) 260,589 6.3 19.7
Key ratios
Net Interest margins (%) 2.7 90 bps 60 bps
Cost/Income ratio (%) 41.6 -290 bps -70 bps
GNPL (Rs cr) 9723.0 -3 -5
GNPL (%) 3.8 -30 bps -100 bps
NNPL (Rs cr) 2048.0 -6.2 -28.7
NNPL (%) 0.8 -10 bps -60 bps 
NPL coverage ratio (%) 78.9 70 bps 700 bps
GNPL: Gross non-performing loans 
NNPL: Net non-performing loans                                                  Source: Company
In Rs crore FY11 FY12E FY13E
Net income 15,665 17,792 21,013
Net profit 5,151 6,156 7,129
EPS (Rs) 44.7 53.4 61.9
PE (x) 25.0 16.9 14.6
P/ABV (x) 2.4 1.8 1.7
ABV: Adjusted book value               E: Estimates                Source: Analyst reports

ICICI’s average low-cost current account and savings account (Casa) deposits improved 70 basis points sequentially to 39 per cent of total deposits. The relatively strong loan growth ushered an expansion in its net interest margins on higher yields on advances, which propelled growth in net interest income. Additionally, life insurance subsidiary, ICICI-Prudential Life, paid out its first dividend of Rs 150 crore and propped up non-interest income. This would have been marginally lower than the same period last year due to MTM losses on equity investments and security deposits held against sale of NPAs. The growth in net profit growth in the quarter reflected tight operating cost controls and lower provisioning charges.

Mixed outlook
While loan growth should stay strong, analysts expect the focus on lower-yielding priority sector lending to restrict further NIM expansion to about 10 basis points paralleling management guidance. Together these would aid net interest income growth, while improving environment could boost investment book yields flowing through to healthy pre-provisioning profit growth. Management has also guided for a steady outlook on dividend income from its life insurance subsidiary contributing to an improved near-terms earnings outlook.

However, higher credit costs from deteriorating and additions to restructured book could pinch going ahead. The bank’s exposure to infrastructure companies is an overhang, says Nilanjan Karfa, banking analyst with BRICS. This will be so, “unless there is some impetus” from government policy. He believes that it would be difficult for the bank to maintain its provisioning cost guidance at 70-80 basis points, especially if the thrust on retail portfolio growth is also sustained over the next few quarters. Provisioning is at historical lows and should it sustain, it will tell on yields and NIMs, he adds.

This raises concerns on its medium-term outlook which makes growth at 20-22 per cent a key element to these elevated valuations. A lot hinges on an improving macro environment. In spite of the general ebullience in the markets, not much has really changed on the ground, say economists who expect an actual change in numbers by second half of FY13. A rate cut is probable only in the April annual monetary policy review, as any action earlier is hinged on core inflation movement, says Shubhada Rao, chief economist, YES Bank. Oil prices are therefore a key risk to a policy softening, she adds.

First Published: Fri, February 24 2012. 00:31 IST