ICICI Bank: Asset quality stress bottoming?

Even as the headline asset quality ratios have risen, net additions to stressed loans have moderated

ICICI Bank’s asset quality trends were weak in the quarter ending March 2015 and disappointed the Street, but the incremental stress was lower than expected.

For the quarter, both gross non-performing assets (NPA) and net NPA inched up. While gross NPA increased 75 basis points year-on-year to 3.78 per cent, net NPA increased 64 basis points to 1.6 per cent. Sequentially, too, these ratios increased 34-38 basis points. Higher NPAs saw provisions surge 88.2 per cent y-o-y and 37.1 per cent sequentially to Rs 1,344 crore. However, the incremental stress addition remained moderate in the quarter gone by. Consider this. The bank restructured loans worth Rs 1,247 crore in the quarter, compared with its guidance of Rs 2,300 crore given at the end of December 2014 quarter. Secondly, the management indicated that of the fresh slippages of Rs 3,250 crore, about Rs 2,246 crore were on account of slippage from restructured assets to NPAs. The actual net addition to stressed loans stood at Rs 1,004 crore. ICICI Bank had added stressed loans (net) worth Rs 1,504 crore in the December 2014 quarter. Notably, the management indicated they are not witnessing any client or industry-specific pressure on asset quality and has guided for a restructuring pipeline of Rs 1,500 crore for the June 2015 quarter. For FY16, too, additions to restructured assets and NPAs are likely to be lower than that in FY15, indicated the management.

  Given the reducing pace of incremental bad loans, analysts such as Vaibhav Agrawal of Angel Broking also believe that ICICI Bank’s asset quality seems to be bottoming.

Operationally, the bank put up a mixed show. While net profit of Rs 2,922 crore (up 10.2 per cent y-o-y) was ahead of Bloomberg consensus estimate of Rs 2,876 crore, loan growth fell short of expectations. Loan growth at 14 per cent was lower than expectations of 16 per cent growth, as well as lower than 20.6 per cent reported by HDFC Bank.

ICICI Bank’s net interest income grew 16.6 per cent y-o-y to Rs 5,079 crore — slightly better growth than what was posted in the past two quarters. The rise in net profit though was partly aided by a 196 per cent y-o-y surge in treasury income to Rs 726 crore. Fee income growth of 8.3 per cent y-o-y to Rs 2,137 crore was the highest growth for the bank in FY15, fuelled by healthy traction in retail fee income (60 per cent of total fee income).

For the stock, which at Rs 302.4 a share trades at 2.3 times FY16 estimated adjusted book value, most concerns seem to be priced in.