If there is talk of green shoots in the economy, they may not find much credibility going by the results declared by lenders such as ICICI Bank and Axis Bank. Both banks continue to remain cautious on the quality of their corporate loan book.
ICICI Bank that declared its March quarter results today added about Rs 7,000 crore to the bad loan book, taking its gross non-performing assets to 5.8 per cent of loans, up from 3.78 per cent during the same quarter last year. While such a sharp slippage was expected on account of the asset quality review undertaken by the RBI, several other parameters indicate more pain ahead for the bank.
For one, ICICI Bank has made a contingency reserve of Rs 3,600 crore during the March quarter, which is over and above the provisions made for non-performing and restructured loans. This provision has impacted the net profit for the quarter, which has fallen sharply by 76 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. These sectors being iron and steel, mining, rigs, power and cement. This is indicative of the management’s cautious outlook for the FY17 fiscal, much like its peer Axis Bank that created a Watch List of accounts which could be a key source of future stress in the corporate loan book. Accounting for outstanding loans of around Rs 22,600 crore, iron & steel and power, constituted a chunk of this watch list (23-24 per cent each).
Secondly, aside from bad loans, the substantial increase in slippages for ICICI Bank in recent quarters, from restructured assets also remains a concern. From Rs 292 crore in the June quarter, slippages have shot up to Rs 931 crore and Rs 1,355 crore in the September and December quarters respectively. In the latest March quarter, Rs 2,700 crore of restructured loans have slipped into bad loans. ICICI Bank has restructured loans under the 5:25 scheme and strategic debt restructuring to the tune of Rs 679 crore and Rs 1,200 crore during the quarter. Assets sold to asset reconstruction companies (ARCs) stood at Rs 700 crore.
The bank’s calibrated approach to lending to the corporate sector is also indicative of the perceived risk in the sector. In 2015-16, the bank’s 16 per cent growth in domestic loans was driven by a robust 23 per cent growth in retail loans, offsetting the weak trend in the corporate segment. For the FY17 fiscal, the bank has set a target of 18 per cent growth in domestic loans, again to be driven by about 25 per cent growth in retail loans. For the corporate segment, the management expects only a 5-7 per cent growth in loans, given that they would be lending only to high rated corporates and reducing the concentration risk in the portfolio.
Unlocking value
While asset quality is likely to remain a concern, unlocking of value in its insurance subsidiaries can be a key positive. The Insurance Laws (Amendment) Bill, 2015, that was passed last year increased the FDI limit in insurance from 26 per cent to 49 per cent. This triggered many deals in the insurance sector. Now, private insurers are looking to get themselves listed this year. The board of directors of ICICI Bank on Friday, approved the sale of a part of its shareholding in ICICI Prudential Life Insurance Company through an initial public offering. The size and other details of the offer would follow in due course.
ICICI Bank had recently sold its 6 per cent stake in ICICI Prudential Life Insurance Company, which valued the insurance company at Rs 32,500 crore. ICICI Prudential Life Insurance ranks number one amongst the private insurers.
Recently, Housing Development Finance Corporation (HDFC) announced that it would offload its 10 per cent stake in HDFC Standard Life through an offer for sale.