ICICI faces brunt of a faltering economy, worst isn’t over for banks yet

Mumbai: It is just not only the state-run banks, even country’s largest private lender by assets, ICICI Bank, has had its share of woes in the December quarter from the deteriorating asset quality as more companies failed to meet their repayment obligations in a sluggish economy. ICICI Bank, on Friday reported a lower than expected net profit of Rs 2,889 crore in the three months ended 31 December, weighed down by a notable rise in its bad loan levels and subsequent provisions. There is a clear build up of stress on the books of the banks. Its gross non-performing assets (NPAs), during the quarter, has risen to Rs 13.082 crore from Rs 11,547 crore in the preceding quarter and Rs 10,399 crore in the corresponding quarter last year, most of which emerged from corporate loan.[caption id=“attachment_2005353” align=“alignleft” width=“380”] Hurt by falling economy. Reuters[/caption] In percentage terms, the gross NPAs increased to 3.4 percent from 3.12 percent in the September quarter and 3.05 percent in the same quarter last year. Higher bad loans lead to increase in provisions which rose to Rs980 crore in the December quarter from Rs 694 crore in the year-ago quarter. Under current norms, banks need to set aside money to cover provisions. This can range from 20 percent to 100 percent depending upon the nature of the asset. To be sure, it is not all bad for ICICI bank in the December quarter. The bank has posted healthy growth in the net interest income, the difference between the interest expended on deposits and earned on advances, by 13.1 percent, to Rs 4,811 crore from Rs 4,255 crore in the year-ago quarter. During the quarter, the bank grew its loan book, by 13 percent, of which the retail advances grew by 26 percent. The other income, which includes the fee-income, grew by a modest 10.4 percent. But all the positives are outweighed by the sharp rise in bad loans. If one takes a closer look at the ICICI Bank numbers, the pain emerging from restructured assets is quite visible. The bank’s net restructured portfolio currently stands at Rs 12,052 crore. According to ICICI managing director and chief executive officer, Chanda Kochhar, a delayed economic recovery has hurt the bank. “Due to the prolonged economic slowdown, there have been higher slippages from the restructured portfolio,’ Kochhar said in a post result press conference to reporters. “The trend of NPAs from restructured loans has not come to an end. We may see some more. Restructuring was done on assumptions of a pick up in economy (which hasn’t happened yet to the desired extent),” Kochhar said. According to Kochhar, ICICI Bank has Rs 2,300 crore restructured loan pipeline in the current quarter. ICICI’s asset quality trend is in contrast to its other rivals in the private sector such as Axis and Yes Bank, which have reported a stable asset quality trend. To be sure, ICICI has a much larger, diversified loan book to corporations. Going by the current indications, the stress on ICICI Bank’s asset quality front, especially from the restructured loans, is likely to continue in few more quarters. A lot will depend on how soon the economy gets back to the growth track. As of now, there hasn’t been any significant pick up in core sectors, despite an improvement in business sentiments. ICICI Bank shares fell 4.95 percent to Rs 361.15 when India’s benchmark equity index, Sensex was trading at 29182.95, 498.82 points or 1.68 percent down. Bankex, the index of major bank stocks, was trading at 22715.52, down 3.14 percent. Early in the day, state-run BoB too had reported a sharp spike in its bad loans in line with the trend seen in other government banks. The central bank has been pushing banks to monitor loan accounts closely to avoid future slippages. The new RBI norms require banks to recognize the early stress on their assets and act accordingly. In the past, a loan account become bad only when there are no payments for a period of three months. As against this, banks now need to recognize stress on their books fro individual accounts much earlier (if repayments are overdue between (31-60 days) when they see early signs of repayment difficulties. In all likelihood, the stress on banks’ balance sheet will continue for few more quarters before showing some improvement. That, provided, the Narendra Modi government indeed succeeds to take the faltering economy back to the high growth path by addressing the much needed structural changes on the ground to revive stalled projects and bring in fresh investments. Even then, the result will show on the books of banks with a lag of few quarters since it takes time for companies to improve their cash flows and resume prompt repayments to lenders. (Kishor Kadam contributed to this story.)