ICICI Bank: Disbursements improve, but asset quality risks can weigh on earnings

Steady improvement in disbursements with segments such as home loans, auto and rural loans reaching or crossing pre-Covid levels, collections across loans close to pre-pandemic levels, significant provisioning buffer and strong capital ratios are positive trends in ICICI Bank’s September quarter results.

However, for the private lender that has been grappling with asset quality woes in recent years, the second half could see significant rise in delinquencies. The additions to the bad loan and stressed book in the September quarter, are a concern. Hence, it will be critical to watch whether the existing provisioning buffer, can completely cushion the blow on earnings in the coming quarters.

ICICI Bank had beefed up its provisioning by ₹5,550 crore in the June quarter using up the gain made on partial stake sale in its insurance subsidiaries (after the sizeable ₹2,725 crore in the March quarter), to cushion the impact of Covid-19. In the September quarter, the bank made additional ₹497 crore provisions against accounts that were not classified as NPAs (owing to the Supreme Court order). The aggregate Covid-related provisions that the bank holds as of September stands at ₹8,772 crore. The bank has also raised ₹15,000 crore of capital during the quarter, taking its Tier-1 capital ratio to 17 per cent. All of this can mitigate the impact of higher NPAs, on earnings and balance sheet, in the second half of the fiscal. But given that there is still huge uncertainty over the actual impact of the pandemic on asset quality (for the entire banking sector), risks to earnings persists.

Additionally, with slippages and write-offs remaining elevated through FY20, it would be important to watch out for these trends in the second half, along with its sizeable stressed book.

Higher exposure

Higher exposure to stressed corporates and sectors have weighed on ICICI Bank’s asset quality in recent years. In fact, through FY20, additions to gross NPAs remained elevated (at ₹2,500-5,300 crore).

In the June 2020 quarter, additions to NPAs had fallen substantially to ₹1,160 crore. But in the September quarter, slippages have shot up to ₹3,017 crore (₹1,749 crore in retail and ₹1,268 crore in corporate and SME). This overall addition to bad loan book is notable and excludes ₹1,410 crore of loans not classified as NPAs owing to the Supreme Court order (accounts not declared as NPA till August 31, are not be declared as NPA till further orders). Given that peers such as Axis Bank and IndusInd saw modest additions to NPAs in the September quarter, ICICI Bank’s slippage trends may need a closer watch in the coming quarters.

While the management has indicated that the trends in collections in September and October were close to pre-Covid levels, the percentage of the performing retail and credit card portfolio, which was overdue at September 30, was about 4 per cent higher than the normal pre-Covid trend. This, the management expects, could moderate as collections pick up further.

For ICICI Bank, its sizeable stressed pool (BB and below rated book) is another aspect to watch out for. In the September quarter, BB and below rated book stood at ₹16,167 crore, marginally lower than ₹17,110 crore in the June quarter. However, downgrades to the stressed book remained notable at ₹1,698 crore and ₹1,212-crore accounts slipped to NPAs (includes devolvement of non-fund based outstanding to existing NPAs). There could be further downgrades in the second half.

The bank’s ₹8,772 crore of Covid provisions does offer comfort, but whether it would suffice to absorb the losses completely on account of likely rise in delinquencies needs to be seen. The management expects normalisation of credit costs in FY22, and hence medium-term pain could persist.

Operational performance

Improvement in disbursements across retail segments is a positive for the bank. The bank’s domestic loan book grew 10 per cent YoY and 4 per cent QoQ in the September quarter. Retail loans grew 12.8 per cent; within retail, home loans grew by 11 per cent, business banking by 37 per cent, and rural lending by 18.7 per cent. While disbursements in the commercial vehicle and personal loan segments improved in the September quarter, they remain below pre-Covid levels. Credit card spends have also recovered to about 85 per cent of pre-Covid levels in September. SME growth was also strong, (including ECLGS sanction of ₹16,000 crore). Steady and sustainable recovery in loan growth alongside strong deposit growth can aid core earnings in the coming quarters.

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