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Photo: Reuters
Photo: Reuters

ICICI Bank beefs up covid-19 provisions, but slippages should worry investors

  • ICICI Bank chose to make higher-than-mandated provisions for risks from the pandemic.
  • Analysts expect a hit to loan growth and asset quality due to the nationwide lockdown

ICICI Bank Ltd has strengthened its provisions to mitigate potential risks arising out of the coronavirus pandemic and the subsequent lockdown. However, investors should not take their eyes off elevated slippages.

The private sector lender reported a net profit of 1,221 crore for the March quarter, missing analysts’ estimates by a mile. The 16 analysts polled by Bloomberg put average estimates of net profits at 3,510 crore for the fourth quarter of FY20.

Profit took a hit as ICICI Bank chose to make higher provisions than what was mandated by the Reserve Bank of India (RBI).

Bracing for impact.
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Bracing for impact.

In that light, the net profit miss could be overlooked. The private lender set aside 2,725 crore as specific provisions towards the impact of the lockdown.

As per RBI rules, the bank was required to make provisions of just 600 crore, the management said in a media call. RBI has mandated banks to provide 5% for accounts availing interest moratorium in each of the March and June quarters.

About 30% of the bank’s borrowers across corporate and retail have availed the special covid-19 moratorium, wherein interest payments are postponed for three months, the management said in the call. These accounts are protected from being labelled as bad for the said three months. However, once the moratorium ends, the litmus test on these accounts would begin.

The pressure from slippages from these segments is palpable. ICICI Bank’s elevated provisions indicate that the lender is also worried about these risks.

Analysts seemed to agree. “We expect loan growth to moderate given the weak macro environment, weighed by the covid-19 outbreak. The BB and below pool is likely to increase, while a high share of loans under moratorium would result in elevated slippages over FY21," wrote Motilal Oswal Financial Services Ltd analysts in a note.

ICICI Bank is far from getting a grip on its slippages. These increased 50% year-on-year (y-o-y) in the March quarter because of two large corporate accounts. The covid-19 impact is expected to exacerbate this pain.

The lender’s watchlist of loans rated below BB is now at 16,670 crore. The lockdown could push this up considerably, according to analysts.

Meanwhile, the pressure on credit growth because of the lockdown could make bad loan ratios look ugly. For the March quarter though, gross bad loans were marginally down from a year ago.

ICICI Bank is not an outlier in terms of the impact of the coronavirus-led lockdown.

Even so, how it manages its slippages will be key to any relook at its valuations. The bank’s stock dropped 4.6% on Monday and trades at 1.7 times its estimated book value for 2020-21.

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