ICICI Bank reported 8.3% incremental asset stress in third quarter of fiscal 2016, largely driven by a lumpy steel account. Although the P&L (profit and loss) impact was absorbed via profits from the Pru Life stake sale, the sticker shock of a 95bp jump in the GNPL (gross non-performing loans) could be significant. Beyond the immediate term, however, the slippage is within the incremental 5% stress we discussed in January, and we think it is in the price. We continue to see value (1x FY17 PBV, ex-subs) even if the near-term outlook is volatile due to risk of lumpy NPL (non performing loan) slippage.
NPLs: The accelerated slippage was largely from one steel account, somewhat driven by the RBI’s objective of early recognition-management guided similar slippage in Q4FY16e (estimates). Credit costs spiked to 269bp as the loans slipped straight to the doubtful category. There was additional 213bp stress from SDRs (debt to equity ratio) and restructuring (not reckoning overlaps).
Accelerating growth: Loan growth accelerated to 16% y-o-y, driven largely by retail at 25%. However, the wholesale segment also accelerated to 15%, a common theme across the large private sector banks. Margins remained largely stable, although Q4 and F17e could see some impact from the large NPL recognition. Fees remain weak at 7% y-o-y.
Earnings revision: The P&L impact of the incremental NPL provision is not large. While we have pushed up our credit costs to 186bp for F16e, this is offset by the profit from the insurance sales of R33 bn. The upfronting of the NPL recognition should be offset by lower provisions in FY17/FY18e —we are not capturing that until we assess the impact of early recognition on LGDs.
Q3FY16 Conference call highlights
Out of the total slippages of R65.4 bn, ~R43.5 bn was on account of a change in asset reclassification as per RBI in only one account in the steel sector. The normalised slippages excluding this were lower at 2.07% v/s 2.22% in Q2FY16.
Management expects slippages of ~R65 bn in Q4FY16 at similar levels as in Q3FY16. Almost 2/3rd of the slippages are expected to be due to the change in asset reclassification as per RBI in the power sector.
Management believes that the change in asset reclassification is not likely to impact the recoverability of the asset.
Management did not give any guidance on the asset quality in FY17e. The bank will make additional provisions of R3.5bn for vulnerable restructured assets at 10% as per RBI directive.
The bank classified R4.5bn of assets under 5/25 scheme and R16.7 bn of assets under the SDR route. The current pipeline under 5/25 scheme is at R7bn & R12bn under the SDR route.
A substantial part of the incremental delinquencies were classified under the doubtful category; the corollary of it is that the bank has taken a major provision hit on the incremental slippages.
We had estimated R75 bn of incremental stress through to FY18—this falls within that estimate but the lumpiness is a negative surprise. We had expected the provision hit over the next ten quarters. Given that the substantial part of stress recognition is front ended it is only the timing difference. We will not change our FY17/18e estimates until we assess the impact of early recognition on LGDs.
Retail loan growth was robust at 24% y/y driven by strong growth in home loans at 24% y/y. Management expects retail loan growth of 25% y/y driven by increasing distribution network & focusing on existing customers.
Domestic corporate loan growth stood at 15% y/y. The incremental loans were mainly to highly rated corporates including PSUs. SME loan growth was strong at 21% y/y.
Fee growth remained muted at 7% y/y. Though the retail fees continue to remain strong the overall fee income was impacted by subdued corporate fees. Retail fees contributed ~2/3rd of the total fees.