ICICI Bank: Asset quality pressures intensify

The firm is witnessing increased stress in its steel and power sector loans portfolio

A strong surge in provisions wiped away the gains of healthy loan growth for ICICI Bank in the December quarter. Loan growth at 16 per cent was healthy and similar to the trend in recent quarters. However, the bank's slippages jumped nearly three times sequentially to Rs 6,544 crore in the quarter. Slippages indicate the change in classification of restructured assets as non-performing assets (NPAs). About 67 per cent of total slippages in the quarter were due to the RBI’s directives on NPA recognition. The remaining Rs 2,160 crore is a tad lower than September 2015 quarter’s slippages of Rs 2,242 crore.

Cautious management commentary on asset quality, particularly from increased stress in steel and power sectors (about 10 per cent of total domestic loan book), indicates that the pain is far from over for the bank. Management indicated that the bank will account for similar slippages of Rs 6,544 crore in the March 2016 quarter as well - half of which will come in from the restructured books. Post the weak results, analysts have started toning down their expectations. Nitin Kumar, Financials analyst, at Prabhudas Lilladher, for instance, has trimmed his target price by 15 per cent to Rs 315 after the results and believes asset quality overhang will continue to keep the stock under check.

ICICI Bank's asset quality trends were weaker than those at its peer- Axis Bank believes Suresh Ganapathy of Macquarie Capital. With these relatively better placed private players feeling the heat, the performance of PSU banks could be even worse, say analysts. The impact of higher provisioning for bad loans though was mitigated by non-core, unsustainable one-off profit on sale of stake (Rs 1,243 crore) in the bank's life insurance subsidiary and lower tax rate (down 1,000 basis points to 18.8 per cent). Consequently, ICICI Bank's net profit grew 4.5 per cent year-on-year to Rs 3,018 crore and was slightly lower than Bloomberg consensus estimate of Rs 3,058 crore.

Operational performance was steady with net interest income growing at a healthy 13 per cent to Rs 5,453 crore. Fee income growth though continued to be subdued on the back of muted corporate activity. The total capital gains on the life insurance stake sale is about Rs 3,300 crore and the bank will account for the balance gains post receiving approvals for the deal, which means there is cushion in the current/next quarter (depending on the approval time).  The bank plans to focus on refinancing opportunity. This, with adoption of marginal cost of funds to calculate base rates, will lead to some pressure on net interest margins. Given results came post market hours, expect some weakness.