A significant rise in slippages, sharp increase in write-offs, sizeable Covid-related provisions and slowdown in domestic loan growth are key highlights that sum up the latest March quarter results for ICICI Bank.

While the increased slippages on account of the bank’s overseas exposures to two accounts (involving misrepresentation of the borrowers’ financials) was on expected lines, steep write-offs and notable addition to the bank’s BB & below rated loan book would need a watch in the coming quarters.

Increase in delinquencies from accounts under moratorium (30 per cent), build-up in BB & below rated book and sharp slowdown in loan growth are key risks to earnings.

However, the bank’s strong capital ratios are likely to cushion the impact of future losses; prudent provisioning against Covid-related impact and healthy deposit flows lend comfort in volatile times.

Asset quality likely to worsen

For ICICI Bank, much like its peer Axis Bank, asset quality has been under focus over the past two to three years owing to relatively higher exposure to stressed corporates.

During the March quarter, additions to gross NPAs were high at ₹5,306 crore (₹4,363 crore in the December quarter). The slippages were led by the corporate and SME segment, which was mainly driven by two accounts — a healthcare group based in West Asia and an oil trading company based in Singapore (where borrowers appeared to have misrepresented their financial position). This was broadly factored into the result expectations.

However, despite the sharp slippages, the bank’s GNPAs reduced to ₹41,409 crore in the March quarter (from ₹43,454 crore in the December quarter) mainly because of sharp write-off of ₹5,455 crore. ICICI Bank’s write-offs have been steadily on the rise in the past two quarters. Write-off means that the bank fully provides for such bad loans (taking a knock on profits) and takes them off the books. A sharp rise in write-offs in future can impact earnings.

The bank’s slippages could remain elevated in the coming quarters, owing to Covid-led disruption across sectors, delinquencies in accounts under moratorium and the bank’s still large stressed book.

The bank’s loans under moratorium constituted about 30 per cent of total loans (end April). Loans that were overdue more than 90 days at March 31 but have not been classified as non-performing were ₹1,309 crore. ICICI Bank’s stressed pool (BB and below rated book) remains sizeable at ₹16,668 crore (₹2,288 crore downgraded to stressed pool in the March quarter), which can keep slippages high.

The Covid-induced slowdown in the economy could accentuate the pain further as substantial downgrades are expected in the coming months. During the March quarter, ₹1,726 crore of corporate and SME slippages came from the BB and below rated pool.

Slowdown in loan growth

The bank’s loan growth in March was impacted due to Covid-19. The domestic loan book grew by 12.9 per cent in the March quarter, down from 16.5 per cent growth in the December quarter. Retail loan growth also slowed considerably in the March quarter, to 15.6 per cent (from 19.3 per cent in December). While further slowdown in loan growth will impact earnings in the coming quarters, delinquencies in credit card and personal loan portfolios will also need a watch.

Remember the bank’s growth in retail loans in recent quarters has been led by unsecured segments such as personal loans and credit cards. In the latest March quarter too, the two segments grew by a robust 46 per cent and 27 per cent respectively. However, the management has stated that about 70 per cent of personal and credit card portfolio is to existing customers, with 85 per cent to salaried individuals.

Strong capital buffers

Amid Covid-led slowdown and pressure on asset quality, ICICI Bank’s strong capital ratios and substantial provisions lend some comfort. The bank’s provision cover stood at 75.7 per cent in the March quarter and it has made a sizeable ₹2,725 crore of Covid-related provisions. ICICI Bank’s total capital adequacy ratio stood at 16.1 per cent as of March 2020, with Tier 1 at 14.7 per cent. The strong capital base provides buffer to absorb future losses on account of rise in delinquencies.