The end is still not in sight for ICICI Bank’s bad loan mess

It has been three quarters since the knuckle rap from the Reserve Bank of India on asset quality and ICICI Bank Ltd’s grip on its bad loans is still slippery. The largest private sector lender reported a 17% increase in its gross non-performing assets (NPAs) for the December quarter and the bad loan ratios worsened, partly due to decelerating credit growth.

ICICI Bank’s gross NPA ratio jumped 1.09 percentage points sequentially to 7.91% for the quarter ended December while net NPA ratio rose to 4.35%. The ratios look ugly because demonetization took a chunk off the bank’s incremental disbursals and domestic loan growth decelerated to 12% as of December from 15.9% in the September quarter.

The slowing pace of slippages is but a mild relief for investors. During the third quarter, Rs7,057 crore worth of loans turned bad, lower than the previous two quarters. But given that the pain points have now shifted to the non-watchlist part of the loan book, investors would turn a blind eye to slowing slippages. As against more than 50% of slippages coming from the watchlist in earlier quarters (the bank disclosed its watchlist in March), only 40% came from the list this time.

Essentially, around 60% of slippages in the nine months ended December have come from outside the watchlist. The list itself stands at Rs27,536 crore and 27% of it has already gone bad.

However, the ICICI Bank management has sought to allay some fears and chief executive officer Chanda Kochhar said that more than 75% of slippages are from known pain points that include the watchlist, the restructured book and non-fund exposures of existing bad loans.

A silver lining here is that the lender’s disbursals to companies outside the watchlist that have a rating of A- and above have grown by 15% although the overall corporate loan book has grown by just about 5%. Retail loan growth continues to be the bedrock of credit growth and the portfolio grew at a brisk pace of 18%.

ICICI Bank may be a victim of economic circumstances in the wake of demonetization but the lender hasn’t completely gotten its act together. Its provision coverage ratio slipped to 57% from 65% a year ago. The outlook for future slippages, health of its watchlist and even loan growth remains murky with the management sounding at best vague on all these.

It is no surprise that the stock has lost 5% since November even though many of ICICI Bank’s peers have gained. A revival in loan growth and a material reduction in slippages are essential for investors to consider its valuations justified.