Why ICICI Bank numbers are a trailer of what is to follow

Most of the private sector banks and some of the smaller public sector banks have announced their December 2015 numbers. The distinction between the better quality ones and others is coming out very clearly from the numbers.

What comes out distinctly is that once again banks focussed on retail loans have gained more than those who have been betting on wholesale loans. Though there has been visible growth in wholesale credit most banks preferred to go in for retail loans.

But the real surprise was not in the numbers but rather in the disclosures. Thanks to RBI tightening the screws on bank disclosures, the market is now getting a glimpse of the real problem in the banking space.

 

While HDFC Bank has largely come unscathed as the bluest of banks, it did report a slight rise in non- performing assets, but the bank was unaffected by RBI’s guidelines. The same cannot be said for some of the other banks, especially ICICI Bank which is coming in for the brunt of the attack from analysts.

Many analysts suspected that the bank’s number might deteriorate in the December quarter but they were still surprised by some of the details. Suresh Ganapathy of Macquarie Capital Securities says that the market will get spooked by the fact that the management has been giving a guidance of 90-95 basis points (bps) credit cost at the start of the year and has been sticking with the guidance all along, but they have now declared by getting a 180 bps credit cost for the full year, which is almost double of what the management guided.

ICICI Bank’s asset quality witnessed a sharp deterioration with gross NPAs jumping to Rs 6,500 crore as against an average of Rs 2,400 crore in last four quarters. According to Ambit Capital, roughly two-thirds of these fresh NPAs arose due to the RBI’s directive to recognise certain accounts (primarily one large steel account), which are inherently weak even if not technically in default, as NPA. The RBI has given two quarters to recognise these additional NPAs and ICICI Bank’s management expects a similar amount of additional NPAs to be recognised in the fourth quarter as well.

What is bothering the market is the lack of clarity in ICICI Bank’s disclosure. Reports say that management has hinted that there might be other accounts which might come out during the fourth quarter, especially accounts like JP Associates among others.

Ganapathy says that unlike ICICI Bank, Axis Bank has given clarity as to what is their exposure to stressed corporate groups which are highly leveraged and how much to them are classified as NPA or restructure. For ICICI Bank, stressed loans of all shapes and forms (NPA, restructured, 5/25 and SDR) jumped 22 per cent over the previous quarter says Ambit. They now stand at 8.9 per cent of loans versus 7.8 per cent in the previous quarter. Net of provisions, these bad assets are 6.1 per cent of loans and 30 per cent of net worth. In the absence of transparency of the balance sheet, few analysts have a positive view on the bank.

While ICICI Bank has surprised on the downside and HDFC Bank has more or less met expectations, one private bank has surpassed analysts both in terms of numbers and composition of its business.

Yes Bank posted a 25 per cent profit growth at Rs 675.7 crore as compared to market expectation of Rs 628 crore. But the surprising point is Yes Bank has managed to achieve the growth number despite having 67.2 per cent of advances to corporates. Its asset quality too has been good. Gross NPA stood at 0.66 per cent as compared to 0.61 per cent in the previous quarter. Little wonder then that market rewarded the bank with an over 10 per cent jump in its share price.

Though most of the bigger private banks have announced their numbers, all eyes are now on public sector banks that will bear the brunt of RBI’s disclosure norms. Ganapathy feels that public sector banks are likely to post very bad numbers. Already Syndicate Bank has reported a loss. The total provision requirements by RBI is around Rs 1 lakh crore while the cumulative profits of these banks are around Rs 30,000-35,000 crore. Ganapathy feels that provisions will wipe out two-three years of profit.

ICICI Bank is just a trailer of what can be expected from other banks.