 "ICICI Bank Q2 net up 12%, in line with estimates")
ICICI Bank, the country’s largest private sector lender, has reported a 76 per cent drop in net profit for the January-March quarter to Rs 702 crore, as it set aside additional contingency reserve of Rs 3,600 crore. This is its sharpest ever quarterly drop in net profit.
This additional reserve is a “prudent measure” to account for an increase in bad loans that could arise from exposure to the iron & steel, power, mining, rigs and cement sectors. Chanda Kochhar, managing director and chief executive officer, explained the contingency reserve was over and above the one mandated by the Reserve Bank of India.
In an investor presentation, the bank said its total exposure to these five sectors was Rs 44,000 crore at the end of March 31, 2016. It also stated that these sectors account for 4.8 per cent of its total exposure. Going forward, the management expects slippages from these five sectors and, hence, created the special reserve.
“The weak global economic environment, sharp downturn in the commodity cycle and gradual nature of the domestic economic recovery has adversely impacted borrowers in certain sectors like (those mentioned). While banks are working towards resolution of stress on certain borrowers in these sectors, it might take some time for solutions to be worked out, given the weak operating and recovery environment,” Kochhar said.
This additional reserve is a “prudent measure” to account for an increase in bad loans that could arise from exposure to the iron & steel, power, mining, rigs and cement sectors. Chanda Kochhar, managing director and chief executive officer, explained the contingency reserve was over and above the one mandated by the Reserve Bank of India.
In an investor presentation, the bank said its total exposure to these five sectors was Rs 44,000 crore at the end of March 31, 2016. It also stated that these sectors account for 4.8 per cent of its total exposure. Going forward, the management expects slippages from these five sectors and, hence, created the special reserve.
“The weak global economic environment, sharp downturn in the commodity cycle and gradual nature of the domestic economic recovery has adversely impacted borrowers in certain sectors like (those mentioned). While banks are working towards resolution of stress on certain borrowers in these sectors, it might take some time for solutions to be worked out, given the weak operating and recovery environment,” Kochhar said.
Its gross non-performing assets (NPAs) increased by 24 per cent to Rs 26,221 crore at the end of the quarter, from Rs 21,149 crore at the end of the December quarter. Gross bad loans as a percentage of all loans rose to 5.82 per cent from 4.72 per cent in the corresponding quarter last year. Net NPAs increased to 2.98 per cent from 2.28 per cent in the quarter ended December.
With the rise in bad loans, provisions and contingencies also jumped 17 per cent to Rs 3,326 crore in the quarter.
Analyst say what is worrisome is that the pressure on asset quality is expected to continue. In the analyst conference call, the management stated that the NPA additions are going to be at elevated level for FY17 and credit costs will remain high.
The management added it had fully factored in the Asset Quality Review (AQR) which all banks had to undertake as per the RBI guidelines, with lenders directed to recognise stressed assets as NPAs. In the quarter, loans worth Rs 7,000 crore slipped into the NPA category and of this, Rs 2,700 crore were from the restructured book. Kochhar added that of the fresh slippage, 60 per cent was as a result of the AQR.
Loans worth Rs 1,200 crore underwent Strategic Debt Restructuring (SDR) and another Rs 679 crore were restructured under the ‘5/25’ scheme. The bank also sold loans worth Rs 700 crore to asset reconstruction companies.
Net interest income, the difference between interest earned and expended, increased by only six per cent to Rs 5,404 crore as compared to Rs 5,079 crore in the March quarter a year before. Other income jumped 46 per cent to Rs 5,109 crore.
Domestic advances grew 16 per cent, led by growth in the retail book (loans to individuals), about 47 per cent of the total loan book. The management said it would continue to focus on growing its retail asset book, likely to grow by 25 per cent. And, continue a calibrated approach to growing its corporate book, to grow only by five to seven per cent. The focus will be on lending to higher rated companies.
Net interest margin, a key indicator of profitability, slipped to 3.37 per cent from 3.53 per cent in the quarter ended December. The bank remains well capitalised, with a capital adequacy ratio of 16.6 per cent.
