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Mumbai: ICICI Bank Ltd, India’s largest private sector bank by assets, on Thursday posted its lowest profit growth in six years as a sharp rise in bad loans forced it to set aside more money to cover the risk of default.

Net profit for the December quarter was 3,018.13 crore, an increase of just 4.46% from 2,889.04 crore in the year-ago period. A Bloomberg poll of 30 analysts had forecast a net profit of 3,060 crore for the quarter.

Non-performing assets (NPA) surged by 5,291 crore at a gross level during the quarter to 21,149 crore as of 31 December, from 15,857 crore in the September quarter. Provisions rose three-fold in the same period.

The increase in bad loans and provisions followed a directive by the Reserve Bank of India (RBI) to lenders to set aside money against visibly stressed assets besides provisions against accounts classified as non-performing and restructured loans.

Following an intense review of banks’ loans, RBI in December asked lenders to identify accounts showing clear signs of stress and make provisions to cover them in the second half of fiscal 2016.

Banks with exposure to large corporate groups, particularly in the steel, power and cement sectors, are likely to see a surge in their provisions and non-performing assets in the December and March quarters.

Axis Bank Ltd chose to take a one-time hit on profits and provided the entire amount required to cover the risk of default.

ICICI Bank hasn’t identified all stressed accounts for provisioning as per RBI’s review and analysts are seeing this as a clear sign of more stress in the coming quarters. “The numbers are certainly disappointing and the asset quality has worsened more than expected. In Q4, more pain is expected. They have not recognized all the NPAs as per the RBI review and so there could be more NPAs," said Vaibhav Agrawal, vice-president of research, banking, at Angel Broking Ltd.

ICICI Bank’s shares fell 1.69% to 232.95 on Thursday on a day the benchmark Sensex ended barely changed at 24,469.57 points.

With ICICI Bank’s loans to the steel and power sectors making up a cumulative 10% of its loan book, bad loans are set to increase by a similar margin in the March quarter, said Chanda Kochhar, managing director and chief executive officer.

The bank classified 6,544 crore worth of loans as bad during the December quarter, out of which 1,355 crore was from the restructured loan portfolio and the rest due to RBI’s mandate. “RBI had articulated the objective of conservative recognition and provisioning. In view of this, we have taken into account the additions, which were required in December. Given that fact, there could be a similar amount in March quarter as well," Kochhar told reporters.

The rise in bad assets was exacerbated by a large steel company’s account getting reclassified as an NPA.

As a percentage of total loans, gross NPAs surged to 4.72%, compared with 3.77% in the September quarter and 3.04% in the December quarter.

During the quarter, the bank set aside 2,844 crore in provisions against bad loans, three times that of the previous quarter’s provisions of 942 crore. This surge was entirely on account of the regulator’s requirement to identify and provide for stressed assets.

NPAs on a net basis rose to 2.28% of advances, compared with 1.65% in the September quarter and 1.27% in the December quarter of 2015. The bank’s restructured loan book stood at 11,294 crore as of 31 December.

In the quarter gone by, the lender recast 1,600 crore of loans under the strategic debt restructuring initiative, which allows banks to convert debt into equity. It recast 500 crore of loans under the 5/25 scheme, which allows creditors to refinance loans to infrastructure projects over a longer duration. In both cases a bank can classify a stressed account as standard.

Kochhar said that the bank will watch out for fresh slippages and does not have a pipeline of loans for restructuring for the quarters ahead.

Notwithstanding renewed asset quality pressure, the bank’s corporate loan book grew at a faster pace of 15% in the December quarter compared with a 7% growth in the previous quarter. “The demand is indeed from better-rated companies for refinancing their existing loans," said Kochhar.

During the quarter, the bank’s domestic advances grew 20%, most of it coming from retail advances. The lender’s net interest margin, or the difference between the yield on loans and the cost of deposits, improved to 3.53% from 3.46% a year ago.

Net interest income, the difference between interest earned on loans and that paid on deposits, increased 13% to 5,453 crore from 4,812 crore last year.

The bank’s strong retail franchise helped its deposit growth as well. Total deposits at the end of the second quarter rose 15% from a year ago to 4.07 trillion.

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