Q2 COMMENT. ICICI Bank: more pain lies ahead

The performance of public sector banks alone has not been weighed down by deteriorating asset quality. A few large private sector banks too have felt the heat of rising bad loans over the last couple of quarters. ICICI Bank and Axis Bank, which have a relatively higher exposure to troubled sectors such as power and iron and steel vis-à-vis its other private sector counterparts, have been moving in lock-step for the past year on the asset quality front.

The latest September quarter results have been no different. Both banks saw a notable rise in bad loans, with a chunk of fresh slippages coming from the so-called ‘watch-list’ of stressed corporate accounts that these lenders created in the March quarter.

While the watchlist has shrunk for both over the last two quarters, the issue of bad loans appears to be far from over, with the possibility of default from these accounts still high. ICICI Bank’s slower loan growth has only added to its woes, making the issue appear a lot worse.

ICICI Bank saw 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 chunk of the fresh slippages into NPAs has come from the watch-list, which comprises the bank’s exposure to power, iron and steel, mining, cement and rigs.

The bank had outstanding accounts of around ₹44,065 crore at the end of March 2016 under the watch list. This has now shrunk to ₹32,490 crore as of September. Nonetheless, given that a chunk of the reduction (₹9,100 crore) in these accounts has happened from slippages to NPAs, the bank can see more pain in the coming quarters from these stressed accounts.

The assets-under-watch list are still around 7 per cent of the bank’s total loans. For Axis Bank, the outstanding accounts under its watch-list are about 4 per cent of loans.

ICICI Bank has made an additional provision of ₹3,588 crore during the September quarter.

This has impacted the net profit for the quarter, which has grown by a meagre 2 per cent over the same quarter last year. The management stated that the prudent measure to create such provisions is on account of its exposures to certain sectors that continue to witness stress. This is indicative of the management’s cautious outlook for fiscal year FY17.

While on the asset quality front, both ICICI Bank and Axis Bank face similar concerns, the latter at least has a better core performance to bank on.

While Axis Bank’s net interest income grew 11 per cent in the September quarter, compared to the same period last year, ICICI Bank’s net interest income was flat. Overall loan growth stood at 11 per cent for ICICI Bank, far lower than Axis Bank’s 18 per cent growth during the September quarter.

Both banks delivered strong growth in retail loans (21-25 per cent) during the September quarter. But a lower 8 per cent growth in corporate loans impacted ICICI Bank’s performance.

However, this is in line with the bank’s calibrated approach to lending to the corporate sector, as was indicated in the beginning of this fiscal.

The management will continue to lend only to high-rated corporates and focus on reducing the concentration risk in the portfolio. The growth in the corporate segment hence, is expected to remain modest for the remaining part of the fiscal.

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