ICICI Bank on the Path Paved of Pains

Only the performance of public sector banks has not been

overburdened by worsening asset quality. A few large private
sector banks have felt the heat of rising bad loans as well over
the last few quarters. ICICI Bank and Axis Bank, which have
a comparatively higher exposure to distressed sectors such as
power and iron and steel in comparison with its other private
sector counterparts, have been moving in lock-step for the
past year on the asset quality front.
The September quarter results have been no different. Both
the banks witnessed a considerable rise in bad loans, with a chunk of fresh slippages
coming from the so-called watch-list of stressed corporate accounts that were created by
them in the March quarter.

Horses driving the misery carriage:

While the watch list
has diminished for
both over the last two
quarters, the problem
of bad loans appears to
be far from over, the
odds of default from
these accounts still
being high. ICICI
Banks slower loan
growth has only added
to its misery, making
the issue look a lot
worse.

ICICI Bank noticed its gross non-performing assets (GNPAs) increase to 6.8 per cent of
loans in the September quarter, from 5.8 per cent in June. A portion of the fresh slippages
into NPAs has come from the watch-list, which encompasses the banks exposure to
power, iron and steel, mining, cement and rigs.
The private lender had outstanding accounts of around Rs. 44,065 crores at the end of
March 2016 under the watch list. This has now shriveled to Rs. 32,490 crores as of
September. However, given that a part of the reduction amounting Rs. 9,100 crores in
these accounts has ensued from slippages to NPAs. The bank might see more pain in the
coming quarters from these stressed accounts.
Even Now, the assets-under-watch list is around 7 per cent of the banks total loans. For
Axis Bank, the unresolved accounts under its watch-list are about 4 per cent of loans.
ICICI Bank has made a further provision of Rs. 3,588 crores during the September quarter.
This has affected the net profit for the quarter, which has grown by a marginal 2 per cent
over the same quarter last year. The management acknowledged that the discreet measure
to create such provisions is on account of its exposures to certain sectors that continue to
observe stress. This is indicative of the managements vigilant outlook for the financial
year FY17.
While on the asset quality front, both ICICI Bank and Axis Bank face analogous concerns,
the latter at least has a better core performance to bank on.
While Axis Banks net interest income increased 11 per cent in the September quarter as
compared to the same period last year, ICICI Banks net interest income was flat. Overall
loan growth stood at 11 per cent for ICICI Bank, far lower than Axis Banks 18 per cent
growth during the September quarter.
Both banks delivered strong growth in retail loans of 21-25 per cent during the September
quarter. But a lower 8 per cent growth in corporate loans affected ICICI Banks
performance. However, this is in line with the banks regulated approach to lending to the
corporate sector, as was hinted in the beginning of this financial year.
The management will continue to provide only to high-rated corporates and focus on
reducing the concentration risk in the portfolio. Hence, the growth in the corporate
segment is expected to remain reticent for the remaining part of the financial year.

Another factor adding the misery to ICICI Bank is low rate of upgrades and recoveries. In
the September quarter, upgrades and recoveries stood at Rs. 800 crore and have been alike
in the previous quarters as well. In fact, ICICI Bank made upgrades and recoveries of just
Rs 2,184 crore in the complete FY16. To sum up, as ICICI Bank is indemnifying for future
pain by hiking provisions, investors, too, would do well to buy some protection.

The bad loans provisioning balloon:

In what could sound alarm bells in the already slothful banking industry, ICICI Bank Ltd
on Monday reported an increase in the proportion of bad loans to perhaps the highest in 10
years.
While gross non-performing assets (GNPAs) more than doubled on the yearly basis from
Rs. 15,858 crores as at Q2FY15 to Rs. 32,179 crores, provisions went up sharply to Rs.
7,082 crores in the second quarter, compared to Rs. 2,514 crores in the first and Rs. 942
crore in the year-ago period.
Also, the net interest income, which is defined as the difference between interest earned
and interest expended, was was flat at Rs. 5,253 crores in the second quarter as against Rs.
5,251 crore last year.
Chanda Kochhar, Managing Director & CEO of ICICI Bank, refused to give any guidance
on the percentage of loans included in the watch list that might slip into the bad loan
category.
The banks watch list of potentially distressed loans had slipped to about Rs. 32,500 crore
from approximately Rs. 38,700 crores at the end of June.
Kochhar, referring to clients the bank considers below investment-grade, said on a
conference call that they expect a significant further reduction in this portfolio in the next
six to nine months.

Light at the end of Tunnel:

In absolute terms, slippages look high, but the good news is that 80 per cent of the

slippages has come from the watch list and restructured book. The fact that slippages from
the regular loan book have been controlled is a positive sign and a vital development for
the quarter. Whilst the slippages and credit cost will remain high over the next few
quarters, it seems that the bank will be able to clean up the book mostly and start looking
at regular growth from 2HFY18.
Gains acquired from selling a part of its stake in its life insurance subsidiary and deferred
tax adjustment aided ICICI Bank report a marginal increase in net profit at Rs. 3,102
crores in the July-September quarter. Indias largest private sector bank had posted a net
profit of Rs. 3,030 crores in the year ago period.
All gratitude to the realization of a gain of Rs. 5,682 crores on selling 12.63 per cent in its
life insurance subsidiary ICICI Prudential Life through an IPO, the banks non-interest
income increased to Rs. 9,120 crores from Rs. 3,007 crores in the year-ago quarter.
The bank also got the advantage of higher deferred tax adjustment (DTA) of Rs. 1,247
crores, which helped pull up the profitability in the reporting quarter. The bank saw a DTA
of Rs. 214 crore in the year-ago quarter.
GNPAs went up by Rs. 4,985 crore in the quarter under review. GNPAs, as a percentage
of gross advances, surged to 6.82 per cent as at September-end 2016 from 3.77 per cent as
at September-end 2015.
Against all odds, ICICI bank share price was trading at Rs. 279.90, up by 0.43% as
compared to the 0.10% rise in the Benchmark Index Nifty at 11:54 AM on 8th November
2016.

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judgment while making investment decision.
Dynamic Equities Pvt. Ltd - SEBI Investment Advisory Reg. No.: INA300002022

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Article Written by
Tanaya Nath