ICICI Bank: Second time unlucky?

The private sector lender was hit by N PA sin its retail book in 2008-09 and now on the corporate side. Analysts are looking at Q 1 results for direction

ICICI Bank, the country’s largest private-sector lender, has had analysts and investors worried in the past few quarters as the quantum of bad loans pile up and profits take a hit. Though the management has been trying to allay fears, it hasn’t helped much.

In this calendar year, yearto-date, the stock has gained just 0.2 per cent at a time when the NSE private bank index clocked 14 per cent growth. In the past one year, the stock value of ICICI Bank is down 13 per cent.

The worry among analysts has increased and parallels are being drawn to the bank’s performance during the 2008-09 financial crisis, when the lender faced rising non-performing assets (NPAs) in its retail book. This time, corporate loans are the problem.

Not surprisingly, questions are being asked about the bank’s long-term growth strategy. In the analysts’ call after the March 2016 results, an analyst pointed out, “Very unfortunately, ICICI Bank has a chequered past and has got almost every cycle wrong.” This seems to be the main worry for the market. The bank declares its April-June quarter results on Friday.

“The market this time is being ruthless to ICICI Bank as compared to some other banks because in less than a decade, there have been two cycles that have gone wrong and ICICI Bank has been caught on the wrong foot in both cases. That is why investor confidence seems low,” said an analyst with a foreign brokerage firm, requesting anonymity.

In the aftermath of the 2008 financial crisis, ICICI Bank began scaling down its retail book and shifted focus to the corporate side. The bank had posted losses in its retail banking division for two consecutive years — in FY10 and FY11. This forced ICICI Bank to shrink its retail book, which declined 37 per cent between FY08 and FY12. In the same period, the bank went on an overdrive in expanding its corporate and wholesale banking assets. (See charts)

As a result, its share of the retail book began shrinking. At its peak, the retail division accounted for 31 per cent of ICICI Bank’s gross standalone revenue. It declined to a low of 25 per cent in FY13 before recovering to 32 per cent in FY16. Corporate banking’s share of revenue, on the other hand, moved from 31 per cent in FY10 to 35 per cent in FY13.

It was during this period of aggressive corporate loan book growth that the lender had sanctioned loans that have now become bad assets.

At the end of the last financial year, the quantum of net NPAs jumped to ~12,963 crore in March 2016, compared with ~1,861 crore at the end of quarter ended March 2012.

ICICI Bank’s gross NPAs jumped to 5.82 per cent of its gross assets from three per cent in FY14. Historically, it has had one of the highest NPAs among private sector banks. The bank’s gross NPAs had ballooned to 5.06 of its gross assets during FY10 thanks to losses incurred on its retail book.

The management says its hit on the NPA front was due to market conditions even as it followed a cautious approach while sanctioning loans.

“We chose projects carefully and our rejection rate was fairly high. For example in the power sector, we approved only one out of three projects that came to us for financing. All projects financed by us were backed by either captive coal mines or coal linkages. Similarly, a large proportion of power output of projects financed by us was backed by power purchase agreements. The outlook for the operating environment and commodity prices when the lending decisions were taken was largely positive,” said an ICICI Bank spokesperson commenting on the growth of its corporate book.

The spokesperson added that the increase in bad loans was because of the economic downturn that changed the financial assumptions of the project, which in turn resulted in stress. “Who could have imagined the meltdown in commodity prices in 2012 or that the Supreme Court would cancel coal mining licences wholesale,” the spokesperson said.

Analysts have also raised doubts over the quantum of loans declared by the bank on the watch-list in the last quarter, an attempt by the lender to step up disclosure norms to calm investors. “We found that our derived watch-list was 35–144 per cent higher than those disclosed by the three banks. For ICICI Bank, our stressed list was 35 per cent higher at ~59,300 crore (5.5 per cent of total exposure),” said a Religare report.

The report explains that it excludes restructured accounts and is only limited to the bank’s exposure to the top five sectors. And on adding in these missing components, the derived watch-list for ICICI Bank shoots up by 35 per cent, which means that there can be more pressure than what the bank has guided for.

In fact, analysts expect that as a result of this, the bank’s earnings may continue to be a drag for the June 2016 quarter as well. An Edelweiss report points out that ICICI Bank has big participation in syndicated loans and therefore will see high pressure on credit costs. A Bank of America Merrill Lynch report expects ICICI Bank’s top line growth to be around 10 per cent as compared to 20 per cent for Axis Bank and HDFC Bank.

In the last few quarters, the lender has decided to change its strategy on the corporate book and has put in place some checks and balances. For instance, it has decided to reduce the single borrower concentration risk to significantly lower than what is prescribed by the regulator. It has also formed a separate credit administration team that will help in recovery of bad loans and will continue to stay away from certain sectors. In the last three years the bank has also reduced the corporate loans book growth from an average of 24 per cent to eight per cent.

Many analysts are willing to buy the story. “Our calculation shows that ICICI Bank will still be left with capital (equity) after providing for all its bad loans unlike many of the public sector banks. This provides the bank growth opportunity in a market that is getting less crowded,” says Dhananjay Sinha, head of institutional equities at Emkay Global Financial Services.

However, the question that investors and the market seem to be asking now, with asset quality pressure mounting every quarter, is how long will the stressed assets pressure continue? The June 2016 quarter results this week should provide some direction.