ICICI Bank: Clarity on NPA resolution needed for more re-rating

Bank made good of gains from ICICI Prudential Life stake sale, Q2 results in line with estimates

ICICI Bank’s stock gained over three per cent on Monday’s trade in expectation of decent September quarter results. Results announced after market hours were in line with expectation.

Net interest income (NII or interest income earned less interest expended) at Rs 5,253 crore almost mirrored the year ago number, while net interest margin (NII as a percentage of total assets) at 3.13 per cent in Q2 declined 40 basis points year-on-year. Most of the gains for the quarter came from higher other income at Rs 9,120 crore versus Rs 3,007 crore in Q2FY16. 

The quarter saw a big helping from the listing of ICICI Prudential Life. The gains from this one-off transaction, classified under treasury income, lifted the non-interest income by Rs 5,682 crore in Q2. However, excluding this, non-interest income still grew a good 14 per cent year-on-year. Total treasury income in Q2 stood at Rs 6,412 crore, while fee income registered flat growth at Rs 2,356 crore. However, analysts aren’t perturbed with these one-off gains as they were in-line with expectations.

What bothers them is the weak asset quality isn’t showing signs of bottoming out yet. Though the bank used one-off gains worth Rs 5,682 crore to create a huge buffer for bad loans (Rs 7,083 crore of provisioning versus Rs 942 crore in Q2FY16 and Rs 2,514 crore in Q1FY17), non-performing assets (NPAs) stood at Rs 32,178 crore, or 6.82 per cent of total assets. NPL (non-performing loans) in Q2FY16 was 3.77 per cent. Despite huge jump in provisioning, net NPAs (or NPAs  minus provisioning) were up sequentially from Rs 15,040 crore to Rs 16,215 crore.

The only silver lining is the reduction in watch list to Rs 32,490 crore as against Rs 38,723 crore in Q1. Nitin Kumar of Antique Stock Broking warns the number is still high as the bank has only a buffer of Rs 2,000 crore of contingency provisioning. “How long the bank will bear the pain becomes critical from here on as one-off cushions are drying up,” he says. 

So, analysts say granular details of the recently concluded Essar-Rosneft deal assume high importance in ascertaining the pain ahead of the bank, given ICICI is likely to be the biggest beneficiary from the deal. With these details likely to be out in one-two quarters, analysts say despite operational parameters remaining healthy, the real recovery in ICICI Bank’s stock may remain elusive. “However, given the correction the stock has had in the last one year, at current levels, there isn’t much downside risk and the margin of safely is comfortable, if the markets are in for a correction soon,” says Siddhart Purohit of Angel Broking.