Win some, lose some: ICICI Bank Q3 net profit falls 32%, revenues up 10%

Bad loan accretion sees some respite and loans grow 15%, but net falls by 32.4% and core revenues up only 10%

ICICI Bank, the country's second largest private lender, posted a mixed bag in its December quarter (Q3) results after market hours on Wednesday. While its core operations might not have left much for investors to cheer, positive trends in asset quality offer hope. 

Net profit plunged 32.4 per cent year-on-year to Rs 16.5 billion for the quarter, against Rs 24.4 billion in September-December 2016. This is the lowest profit in seven quarters. Net interest income grew by only 6 per cent to Rs 57 billion, inadequate to cover for an elevated provisioning cost. Not much support came from non-interest income as well, which fell about 20 per cent year-on-year to Rs 31.7 billion. 

A sharp plunge in treasury income caused by a trend reversal in bond yield movement also led to the decline in Q3. Overall, core operational profit, excluding this factor, grew by about 10 per cent. Overall operating profit dipped 8 per cent year-on-year.

However, as the loan book grew 15 per cent, helped reasonably by the retail (small borrower) segment (up 22 per cent year-on-year), it supported the profitability or net interest margin (NIM). The domestic NIM remained 3.5 per cent; overall NIM was 3.12 per cent. 

Analysts say better than anticipated loan growth aided the loan loss ratios. For instance, even as provisioning costs increased by 32 per cent to Rs 35.7 billion, gross the non-performing asset (NPA) ratio was curbed at 7.8 per cent. While higher by 62 basis points, year on year, it does indicate a plateauing when considered sequentially. Likewise, the net NPA ratio was also maintained at 4.2 per cent. 

In absolute terms, gross NPAs increased by 21 per cent over a year before, to Rs 460.4 billion. However, fresh additions to bad loans or slippages were curtailed at Rs 43.8 billion, about 38 per cent lower than the previous year’s. In fact, data show that slippages is the lowest in two years, which again reiterates that the bank is at the tail of asset quality recognition process. 

The Street can be relieved that no new surprises emerged from the Reserve Bank of India’s risk-based audit for FY17. “It was found the bank did not need to provide any additional disclosure of NPAs in its accounts,” Chanda Kochhar, managing director, told journalists. From recognition, Kochhar is hopeful that the narrative should shift to resolution in the coming quarters. “We should see resolution of cases referred to the National Company Law Tribunal  (NCLT) by the June 2018 quarter,” she said. 

Yet, it doesn’t suggest that provisioning costs should taper in the coming quarters. For one, there’s an immediate requirement (in the March 2018 quarter) to set aside additional money towards the 18 accounts referred to NCLT for resolution. Provision coverage for these accounts stood at 36.4 per cent in Q3. Given that at least half the loan exposure (Rs 100 billion) should be provided for, ICICI stares at additional provisioning of Rs 13.6 billion in the March quarter. 

Lately, the bank hasn’t seen meaningful reduction in the drill-down list (accounts identified as stressed). The list now totals Rs 190 billion. As most of these accounts fall in the below investment grade category, investors should brace for elevated slippages from this list. 

The good thing is that the bank’s capital adequacy ratio (CAR) at 17.65 per cent (up from 15.98 per cent a year before), adequately capitalises it to cover for likely loan losses. 

This is why most analysts give a thumbs-up to the Q3 numbers. “Asset quality has been brought to control for three consecutive quarters. There’s a change in trend and I don’t expect too much trouble ahead,” says Siddharth Purohit of SMC Institutional Equities. ICICI's stock price closed at Rs 352.9, flat against the previous day's close on the BSE.