ICICI Bank Q3: No surprises on the asset quality front

While the bank reported lower slippages, sustainability of this trend will be important

ICICI Bank assuaged some concerns of investors by reporting sequentially lower slippages in the December quarter. This is particularly relevant, given that the RBI’s report on the Annual Risk Based Supervision for FY17 was keenly awaited by the market. Given that its peers such as Axis Bank and YES Bank had reported huge bad loan divergences in the September quarter, the likelihood of ICICI Bank reporting substantial divergences remained high. But the bank said that the RBI concluded its exercise in the December quarter, and it was not required to make additional disclosures. This, in turn, implies that the additional gross NPAs identified by the RBI does not exceed 15 per cent of the published figure.

While the bank not reporting steep divergences is comforting, it is still early days to indicate that the NPA cycle is bottoming out. Elevated slippages, sizable watchlist accounts and notable portion of loans restructured under the 5:25 scheme and strategic debt restructuring (SDR) require monitoring in the coming quarters.

More pain?

ICICI Bank’s slippages moderated to ₹4,380 crore in the December quarter, from the peak of around ₹8,200 crore in the June 2016 quarter. But these slippages are still above the levels seen prior to the December 2015 quarter, when bad loans started to rise sharply. Also, the bank still has a notable ₹19,000-odd crore of outstanding accounts in the watchlist, which could slip into NPAs in the coming quarters.

For the accounts under the second list (referred by the RBI for resolution under IBC), the bank has made a provision of 36.5 per cent, against the requirement of 50 per cent. The additional provisioning will kick-in in the March quarter. The bank’s exposure to such accounts is to the tune of ₹10,000 crore. Also, while slippages have moderated, provisioning remains elevated owing to ageing of NPAs. With GNPAs still high at 7.82 per cent of loans, bad loan provisioning could be significant in the coming quarters.

Core performance improves

ICICI Bank reported a pick-up in credit growth (domestic) to 15.6 per cent year-on-year (y-o-y) in the December quarter from 12.8 per cent in the September quarter. This growth was led by a sharp jump in loans to SMEs which increased by 15 per cent y-o-y in the December quarter from 6 per cent in the September quarter. The growth has been driven by working capital financing and lending to higher-rated corporates which lends comfort.

In the coming quarters, while credit growth is likely to improve further, sustainability of asset quality performance will be key to attract investor interest.

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