Q3 comment. ICICI Bank: Spurt in net profit overshadowed by spike in slippages

At first glance, ICICI Bank ’s over two-fold rise in net profit in the latest December quarter, decline in bad loan book, and a notable 50 per cent y-o-y fall in provisions may suggest that the asset quality troubles at the bank are finally getting over. But the sharp rise in slippages, addition to stressed book (‘BB’ and below-rated book) and significant write-offs indicate the possibility of further pressure on the asset quality in the coming quarters.

While the one-off recovery from a steel account under the IBC has helped lower provisions (write-back) and boost the overall net profit, the bank’s exposure to a broking company and a South India-based industrial company downgraded to NPA during the quarter, has played spoilsport. As such, recoveries from other accounts have been below the bank’s expectations, leading to higher credit cost (amount set aside for bad loans) for the nine months ended December 2019, as was pencilled in earlier.

Read also:

While on the core front, healthy loan growth and net interest margins are a positive, growth in retail loans led by unsecured segments such as personal loans and credit cards may need to watched. As such, retail bad loans have gone up notably in the December quarter, owing to the stress in the Kisan credit card and commercial vehicle loan portfolio.

Mixed bag

ICICI Bank’s overall GNPAs fell to ₹43,454 crore in the latest December quarter from ₹45,639 crore in the September quarter. As a percentage of the bank’s loans, the GNPA ratio stood at 5.95 per cent in the December quarter (down from 6.37 per cent in the previous quarter).

The substantial recovery from a steel account under the IBC helped boost recoveries (hence a reduction in the NPAs). Deletions to NPAs also included a ₹845-crore conversion of an NPA account to compulsory convertible preference shares as part of a debt restructuring scheme. Total recoveries shot up to ₹4,088 crore in the December quarter, from ₹1,263 crore in the September quarter. But this steep reduction in NPAs was more than offset by the sharp rise in slippages during the quarter.

Gross slippages spiked to ₹4,363 crore in the December quarter from ₹2,482 crore in the September quarter. This was led by several factors.

Elevated slippages

One, on the corporate side, slippages more than doubled to ₹2,473 crore. A broking company account was downgraded to NPA and fully provided for. The bank’s exposure to a South India-based industrial company — where servicing is regular, but refinancing undertaken in 2018 has been assessed to be a restructuring — was also classified as an NPA.

Two, on the retail loan front, slippages increased substantially to ₹1,890 crore from ₹1,323 crore in the September quarter. The management stated that this has been mainly due to NPA additions in the Kisan credit card portfolio and the commercial vehicle loan portfolio.

Slippages could remain elevated in the coming quarters, given the bank’s large stressed book. In the December quarter, ICICI Bank’s stressed pool (BB and below-rated book) increased to ₹17,403 crore from ₹16,074 crore in the September quarter. This included an account in the telecom sector owing to the Supreme Court’s ruling on AGR dues. Likely additions to the stressed book can keep slippages at elevated levels.

Above all, write-offs have moved up sharply in the past two quarters, the write-offs, if they continue, can impact earnings. Write-offs mean that banks fully provide for bad loans (taking a knock on profits) and take them off the books. ICICI Bank’s write-offs shot up to ₹2,460 crore in the December quarter, from ₹926 crore in the June quarter.

Retail loan focus

On the core performance front, the bank’s net interest income (NII) has jumped 24 per cent y-o-y in the December quarter, thanks to 16.5 per cent growth in domestic loans. Healthy growth in retail and SME loans has helped in offsetting the slackness in corporate loans. A conscious decision to de-risk the loan portfolio has been paying off for the bank over the past 2-3 years. From about 20 per cent in FY16, ICICI Bank’s exposure to ‘BB’ and below-rated (including NPA and unrated) loans has come down significantly to 3.2 per cent in the December quarter.

The share of retail loans saw an increase to 62 per cent in the December quarter from about 46 per cent in FY16.

But the growth in retail loans in recent quarters has been led by unsecured segments. In the latest December quarter too, the two segments grew by a robust 51 per cent and 43 per cent, respectively. While the management has stated that delinquency in the credit card and personal loan portfolio has been stable until now, the risk in the portfolios will need a watch.

COMMENT NOW