Bad loan problem at ICICI Bank far from over
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The nervousness in the ICICI Bank Ltd stock was apparent on Friday when it fell 3.5% before the announcement of the bank’s June quarter financials after the market closed.
Although the 25% fall in ICICI Bank’s net profit from a year ago isn’t exactly a surprise, the fact is the fall was cushioned to some extent by a rise in non-interest income and lower tax outgo.
Treasury gains were a big contributor to the increase in non-interest income.
But what the Street really cares about is news whether the bank’s asset quality woes are ebbing. On the face of it, ICICI Bank’s gross non-performing assets (NPAs) have increased by a mere 5 basis points sequentially. Gross NPAs have risen from 4.72% of customer assets in December 2015 to 5.82% in March 2016 and are now at 5.87%.
But one big reason for mitigating the rise in gross NPAs is that assets worth Rs.2,332 crore were sold to asset reconstruction companies (ARCs). Had that not been the case, the number would have been higher. The net NPA ratio has gone up much more, from 2.98% in March to 3.35%. That’s because provisioning came down a bit and the provisioning coverage ratio slipped from 61% at end-March to 57.1% by end-June.
Another dampener was slippages. The March 2016 quarter saw total slippages at Rs.7,003 crore, which rose to Rs.8,249 crore in the June quarter. This number does not include the assets sold to ARCs. According to some analysts, the rate of slippages is worrisome and could lead to nasty surprises in future.
The rise in bad loans took its toll on income growth, as widely expected, with net interest income (NII) rising a mere 0.9% year-on-year (y-o-y). Net interest margin, a key indicator of profitability, fell to 3.16% from 3.37% in March.
In all this gloom and doom, there were some bright spots. The bank’s bad loan watchlist declined to Rs.38,723 crore in June from Rs.44,000 crore, sequentially; overall advances grew by 12% and current and savings (casa) deposits saw a y-o-y growth of 18%. But these are unlikely to allay the market’s worries on asset quality, especially since the lion’s share of the reduction in the watchlist was because the loans slipped into becoming non-performing assets.
ICICI Bank shares have underperformed the Bank Nifty in the past one year. It has been a laggard when compared with the Nifty Private Bank Index on a year-to-date basis. Weakness in asset quality and earnings remains; so, the pressure on the stock is likely to continue for some time.