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5 reasons why ICICI Bank is a difficult buy

By Shishir Asthana
May 03, 2016 06:08 IST
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Consensus continues to be cautious with analysts pointing towards tougher days ahead

ICICI Bank surprised everyone with its higher-than-expected provisioning leading to a sharper fall in net profit. However, the reaction to the company’ results left everyone more perplexed. The stock touched the day’s high on announcement of the results, though it corrected later the slide was slow and marginal given the fact that the bank’s numbers were way below market expectations.

Now that the dust has settled down, we shall take a look at what can be expected from the bank in coming months. Consensus continues to be cautious with everyone pointing towards tougher days ahead.

We look at five reasons ICICI Bank’s result has not gone well with analysts which can have an impact on the stock's performance in the short term.

Numbers are worse than they appear: ICICI Bank's management, while explaining the sharp jump in its non-performing asset allocation, has said they have completely provided for RBI’s Asset Quality Review (AQR).

The bank's net profit seems to be hit by a contingent provision of Rs 3,600 crore (Rs 36 billion), which has been acknowledged by analysts as a prudent step. However, on a closer look there are a number of other worrying factors.

Slippages slip further: Slippages for the quarter stood at around Rs 7,000 crore (Rs 70 billion) as compared to Rs 6,500 crore (Rs 65 billion) in the previous quarter.

These include the impact of AQR, Strategic Debt Restructuring (SDR) of Rs 1,200 crore (Rs 12 billion) and refinancing of Rs 680 crore (Rs 6.8 billion) under the 5:25 scheme. Cumulative stress in the book stands at 6.2 per cent (excluding SDR) of the loan. Relapse of restructured loans were at 40 per cent plus.

Some bad loans and assets were sold: ICICI Bank’s toxic assets would have been higher had not the bank sold Rs 710 crore (Rs 7.1 billion) of loans to Asset Reconstruction Companies (ARC).

HDFC Securities in a result update titled ‘Karma Cycle Revisited’ says that past aggression of the bank in corporate lending continues to haunt ICICI Bank. Profits of the bank would have been lower but for its stake sale of 2 per cent in its life insurance business and 9 per cent in general insurance which raked in Rs 2,130 crore (Rs 21.3 billion).

More potential stress identified: ICICI Bank has reported that the exposure towards its internally identified stressed sectors (power, mining, iron/steel, cement and promoter financing) is at 4.8 per cent or Rs 44,000 crore (Rs 440 billion) of total exposure.

Optimist analysts have taken this as a sign of better disclosure from the bank. These numbers were derived by looking at its exposures that are below investment grade but exclude restructured loans which stand at two per cent and non-performing loans at 6 per cent.

Most of these loans had been disbursed prior to FY13. Motilal Oswal Securities, in its result update has said that the bulk of corporate non-performing loans (NPL) would come from this year between FY16-FY18 and some from restructured loans might slip back to the list.

On a gross basis ICICI Bank has recognised 17 per cent of corporate loans as stress (which is close to one in every five loans) as compared to 14 per cent in the previous quarter.

Guidance revised downward: Almost all analysts tracking the bank have revised their projections and price target downwards. Low loan growth from corporate sector at 5-7 per cent leaves the bank to focus on the retail segment which is expected to grow around 25 per cent.

Further, overseas loan is also expected to decline given the global slowdown. Emkay Research in its note says it sees near term headwinds in terms of asset quality and earnings as one-off gains may not come to help every quarter.

Credit costs are likely to stay elevated (at 170 basis points in FY17), with average RoA (return on asset) and RoE (return on equity) of 1.5 per cent and 12 per cent respectively, in FY17-18.

Photograph: Danish Siddiqui/Reuters

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Shishir Asthana in Mumbai
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