ICICI Bank: Asset quality worry remains

Continued traction in retail a positive but margins could come under pressure

Even as ICICI Bank's slippages came in line with expectations in the December 2016 quarter (third one or Q3 of FY17), there seems no respite on this.

The management expects incremental bad loans to remain elevated. Its gross non-performing assets ratio increased to 7.2 per cent in Q3 versus 6.12 per cent in the September quarter. About a fourth of incremental slippage from the corporate and small & medium enterprises (SME) segments were outside of the bank's watch-list, indicating high stress in its overall book.

While the bank continues to reduce its exposure to the troubled sectors of power, iron and steel, mining, cement and rigs, these are still meaningful at 12.4 per cent and remain a key monitorable. Despite these pressures, the bank provided a lesser amount (provision) for bad loans, which fell five per cent and aided earnings in the quarter. Overall, continued elevated pressure on asset quality is likely to weigh on the ICICI stock, believe analysts.

Net profit fell 19 per cent over the year-before quarter to Rs 2,442 crore and beat the Bloomberg consensus estimate of  Rs2,201 crore. However, a large part of the earnings were fuelled by lower provisions, as well as lower tax rates, which have been inching down in recent quarters. The bank's top line also remained weak, with net interest income (difference between interest earned and expended) falling 1.7 per cent year-on-year to Rs 5,363 crore.

This dip could be partly attributed to reversal of interest income for select loans. While reported operating profit saw a decline, this was on account of the higher base of the December 2015 quarter, which saw gains from stake sale in the life insurance subsidiary. Adjusted for these, profit has increased in low single-digit. Loans, too, grew at a subdued pace of 5.2 per cent on account of a dip in its international book.

The retail (small depositor/borrower) segment, though, boosted the results on multiple fronts. First at 17.8 per cent growth, the segment boosted domestic loan growth, even as corporate and SME loans grew in low-single digits. However, this retail growth was led by a strong surge in unsecured lending (credit card, personal loan and rural loan), which could hurt if economic growth does not pick up for a prolonged period.

The retail segment drove the strong surge in fee income in the quarter, driven by higher credit card fees, foreign exchange and distribution of third-party products. Loans in the retail segment grew faster than the system, indicating it might have gained some market share. While its net interest margin improved sequentially, analysts believe most of the gains could be behind, as bond yields are unlikely to correct meaningfully from here. The impact of reduction in the marginal cost of lending rate will also kick in and weigh on the margins. While the bank is well-capitalised to continue driving loan growth and gain market share, trends in asset quality and margins need to be monitored and could weigh on earnings. The results came after market hours and the stock could see some pressure when the bourses reopen.