Q2 Comment. ICICI Bank: Asset quality overhang a worry

Banking sector’s asset quality woes appear far from over, going by the results declared by leading private banks this week. ICICI Bank, which witnessed increasing pressure on asset quality through the 2015 fiscal, continues to show signs of stress. Addition to bad loans has come in at ₹2,242 crore in the September quarter, against ₹1,672 crore reported in the previous quarter. The bank has seen a substantial increase in slippages from restructured assets. From ₹292 crore during the June quarter, slippages have gone up to ₹931 crore in the September quarter. The bank’s gross non-performing assets (GNPA) rose to 3.77 per cent of loans, from 3.68 per cent in the previous quarter.

But ICICI Bank’s performance has been favourable on other counts when compared with its peers. While the bank’s 17-per cent growth in overall loans (domestic) has been slower than that reported by Axis Bank and HDFC Bank (23-28 per cent), it is still about 9 percentage points higher than the industry. Its high margin retail loans that grew 25 per cent in the September quarter, compares well with the 27-29 per cent growth of peers in this space.

ICICI Bank’s margin performance has also been stable. The bank’s net interest margin (NIM) was flat at 3.5 per cent vis-à-vis the June quarter. The share of low-cost deposits (CASA) remains healthy at 45 per cent as of September 2015.

While the bank scores well on all these parameters, the main concern has been its pace of addition to bad loans and slippages from restructured assets.

Both ICICI Bank and Axis Bank have higher exposure to troubled sectors such as power and infrastructure and hence have higher stressed assets when compared with HDFC Bank.

Bad loans for HDFC Bank are just 0.9 per cent of loans, while restructured assets are 0.1 per cent of loans. Axis Bank has a higher GNPA of 1.38 per cent of loans and restructured assets at 2.65 per cent of loans. ICICI Bank has the highest amount of stressed assets (over 6 per cent) among the three.

The increase in FDI limit in insurance from 26 per cent to 49 per cent will help players in the financial services space unlock value in their insurance subsidiaries through a stake sale.

ICICI Bank approved the sale of 9 per cent stake in ICICI Lombard to its joint venture partner Fairfax Financial Holdings. This unlocking of value is a key positive for investors. But unlike companies such as Max India, Reliance Capital and Bajaj Finserv that derive a chunk (44-85 per cent) of their implied stock value from the insurance businesses, banking stocks such as SBI and ICICI Bank derive a lesser share.

ICICI Bank’s proposed sale values the insurance company at ₹17,225 crore, which is about 10 per cent of the bank’s current market capitalisation.