ICICI Bank Q1: Sharp rise in Covid provisions lends comfort, but asset quality risk persists

For ICICI Bank that has been weighed down by asset quality woes in recent years, the steep rise in Covid related provisions in the June quarter and a steady addition to the bank’s BB and below rated loan book, indicates huge uncertainty around its asset quality and earnings in the coming quarters. Much like its peers, the bank made substantial Covid-related provisions in the March quarter. The spike in such provisions in the June quarter (unlike the trend seen in peers such as HDFC Bank and Axis Bank), though prudent, hints at likely more pain on the bank’s bad loan front.

ICICI Bank made an additional provisioning to the tune of Rs 5,550 crore in the latest June quarter (after the sizeable Rs 2,725 crore in the March quarter), to cushion the impact of Covid-19. But despite the sharp rise in provisions, the bank managed to deliver 36 per cent growth in profit after tax in the June quarter, thanks to Rs 3,036 crore of profit on sale of some stake in its insurance subsidiaries --- ICICI Lombard General Insurance and ICICI Prudential Life Insurance. Lower tax also aided earnings.

While ICICI Bank has reported a fall in loans under moratorium, in line with other private sector banks, it is early days to gauge the impact on its asset quality. With moratorium available until August-end, the actual picture on bad loans will be clear only after the moratorium is lifted in September.

Also read: ICICI Bank Q1 net profit up 36% with gains from stake sales in insurance arms

A sequential dip in loans and fall in the net interest margin will also need to be watched in the coming quarters. However, the bank’s strong capital ratios (Tier 1 capital at 14.6 per cent) and healthy growth in deposits (21 per cent YoY) are key positives that can help cushion some of the pain on earnings. Further monetising of stake in its subsidiaries can provide a buffer to absorb higher provisions and losses in the coming quarters.

Asset quality uncertainty

Higher exposure to stressed corporates and sectors has weighed on ICICI Bank’s asset quality in recent years. In fact, in the previous March quarter, too, the sharp additions to gross NPAs (at Rs 5,306 crore) was mainly led by the corporate and SME segment, driven by slippages in two accounts.

In the June quarter, additions to NPAs have fallen substantially to Rs 1,160 crore and write-offs, too, which had spiked in the March quarter (to Rs 5,455 crore), have moderated sharply to Rs 1,426 crore. But the sustainability of the trend will be critical, as the bank’s slippages and write-offs have been elevated through FY20.

The bank’s loans under moratorium that constituted about 30 per cent of total loans (end-April), have fallen significantly to 17.5 per cent of loans as of June 30. While this is line with trends seen in HDFC Bank and Axis Bank (9-10 per cent of loans under moratorium as of June), for ICICI Bank, the portion of loans under moratorium are still higher than its peers. As such, the trends in moratorium are still evolving and could change drastically for banks in the coming months.

For ICICI Bank, its sizeable stressed pool (BB and below rated book) is another aspect to watch for in the coming quarters. In the June quarter, BB and below rated book stood at Rs 17,110 crore (vs Rs 16,668 crore in the March quarter). Covid-induced slowdown in the economy could accentuate the pain further as substantial downgrades are expected in the coming months.

The bank’s substantial Rs 8,275 crore of Covid provisions does offer comfort, but also raises questions over the need for such high provisioning when its peers hold much lower provisions. After making Rs 3,000 crore provisions related to Covid during the March quarter, Axis Bank incrementally provided Rs 733 crore towards the pandemic in the June quarter. HDFC Bank made an additional Rs 1,000-crore Covid related provisions in the June quarter (after Rs 1,550 crore in the March quarter).

Slowdown in loan growth

Loan growth for ICICI Bank in the June quarter was impacted due to Covid-19. The domestic loan book grew by 9.6 per cent YoY (down 1.2 per cent QoQ) in the June quarter, from 12.9 per cent YoY in the March quarter. Retail loan growth slowed considerably to 11 per cent YoY in the June quarter from 15.6 per cent in the March quarter.

A further slowdown in loan growth can impact earnings in the coming quarters. The bank’s net interest margin dipped notably to 3.69 per cent in the June quarter, from 3.87 per cent in the March quarter, owing to weak credit off-take, falling lending rates and excess liquidity.