ICICI Bank: Asset quality stress up, growth slows

The bank now has to deal with weak top line growth and provision coverage for bad loans

Amid heightened asset quality pressures, favourable movement in treasury (investment gains) has come to the rescue of most banks. As was the case with Punjab National Bank (PNB), ICICI Bank’s net profit, too, was aided by higher treasury income in the June 2016 quarter (Q1). Higher treasury gains, coupled with tax savings, more than compensated for the fall in net interest income (NII) witnessed by ICICI Bank in Q1. NII is the difference between interest earned and interest expenses, and indicates the performance of its core business.

ICICI Bank’s treasury income multiplied 3.7 times over the year-ago quarter to Rs 768 crore and it reversed tax provisions and deferred tax worth Rs 462 crore in Q1. Consequently, its tax rate fell from 27 per cent to 17.3 per cent over the year-ago quarter. These factors restricted the decline in ICICI Bank’s net profit to 25 per cent on a year-on-year basis and enabled it to beat Street expectations. Its net profit of Rs 2,232 crore came in ahead of the Bloomberg consensus estimate of Rs 2,109 crore.

  The concerns on the asset quality, though, are likely to continue. While provisions came down on a sequential basis, the bank's gross and net non-performing assets ratio increased sequentially, as well as year-on-year. Addition in bad loans (slippages), too, remained elevated at Rs 8,249 crore, much higher than recoveries of Rs 792 crore. The bank’s watchlist (loans with potential to turn bad) is one of the highest among peers at Rs 38,723 crore and could lead to higher slippages. Thus, concerns around asset quality could continue to weigh on the stock in the foreseeable future, believe analysts.

The weak asset quality is pulling down ICICI Bank’s top line, as reflected in the flat 0.9 per cent year-on-year growth in its NII to Rs 5,159 crore. This is the bank’s lowest NII growth in 23 quarters (it grew 0.3 per cent in the June 2010 quarter). The management attributes poor NII growth to the lower interest income on account of rising bad loans. In fact, its overseas loan book declined in Q1, offsetting the healthy 16.9 per cent growth in domestic loans. In a post-results call with media, Chanda Kochhar, managing director and CEO of ICICI Bank, indicated that the trend in NII growth would continue till the asset quality pressures ease. Additionally, the bank's provision coverage ratio (excluding technical write-offs; as a percentage of bad loans) is weak; it stood at 44.7 per cent in Q1.

In this backdrop, the ICICI Bank scrip could see pressure going forward.