ICICI Bank now awaits RBI litmus test on bad loan divergence
Mumbai: ICICI Bank Ltd dodged a bullet in the September quarter on the asset quality front as the Reserve Bank of India’s (RBI’s) report card on the lender’s books was not out.
The central bank’s report will state which loans need to be termed toxic as of March 2017. Recall that a similar exercise for fiscal year 2016 (FY16) had thrown up substantial divergences between RBI and banks on bad loans. Then, ICICI Bank had underreported bad loans to the tune of Rs5,105 crore for FY16, according to the RBI report.
This report card is out for Axis Bank Ltd and YES Bank Ltd, and disclosed that both lenders had grossly underreported bad loans in FY17.
Once this report becomes available, ICICI Bank’s position should become clear, possibly in the current quarter. Meanwhile, investors have been regaining faith in the stock, with it having gained 15% in the fiscal year so far.
Sans RBI’s findings, the lender showed a decrease in bad loan accretion for the second straight quarter, a sure sign towards recovery. This, coupled with a decent loan growth of 12.8%, kept bad loan ratios under check. Gross non-performing assets (NPAs) as a percentage of loans slipped sequentially to 8.79% for the September quarter. Fresh slippages fell to Rs4,674 crore, something that the management had alluded to in the beginning of the year.
The bank has become wiser on the lending front, as seen from lower bad loan accretion. But it has not become cautious in provisioning for existing stock of bad loans. Provisions have fallen by a steep 36% to Rs4,567 crore from a year ago and therefore net NPAs are up 44% even though the gross figure has risen by just 36%.
A provision coverage ratio of 59.3% is not historically the best for the bank. But to be fair, the lender has provided for all the accounts referred under the Insolvency and Bankruptcy Code (IBC) that it has exposure to as per regulations.
While bad loan accretion slowed, so did recoveries and upgrades, and this means all is not rosy. ICICI Bank’s write-offs rose 44% sequentially to Rs2,304 crore.
The management hasn’t given any inkling of how it sees the resolution of the nine accounts referred under IBC coming through. The fate of the other 18 accounts for which RBI wants banks to find a resolution by 13 December or else refer them under IBC is not clear either.
Hence, the outlook on asset quality remains muddled. Of course, ICICI Bank has managed to fend off nasty developments on asset quality in the second quarter. But that is a temporary respite at best. Investors would do well to hold their horses on rerating its stock until the bank passes the regulator’s litmus test on bad loans.
The writer does not hold any positions in the companies mentioned above.