ICICI Bank's slippages a worry; experts divided over Q4 show

Increase in slippages in ICICI Bank's fourth quarter of FY16 has already grabbed a lot of market attention, making the Bank Nifty slip over 200 points post the earnings announcement. To take care of the highly exposed sectors — iron & steel, rigs, mining, power and cement — Chanda Kochhar, CEO and MD said while addressing press conference that the bank has made a collective contingency and related reserve for Rs 3,600 crore towards them. Nitin Kumar, Analyst from Prabhudas Liladher, said that banks have mostly sorted their problems with non-performing loans.The Rs 3,600 crore worth of provisioning will help pull down ICICI Bank's credit cost in FY17, he added. The core banking performance of ICICI Bank is key to drive the overall stock price, said Kumar. However, Bajrang Bafna, the Head of Research & Equity Strategy at Sunidhi Securities, said the bank underperformed Street estimates as net interest margin (NIM) and slippages took a hit in Q4. Slippages are around Rs 9,000 crore, which are below our expectation on both operational and asset quality fronts, he added. He found it difficult to assess whether or not the worst is over for the banking sector.Below is the verbatim transcript of the interview with Nitin Kumar, Analyst from Prabhudas Liladher, Bajrang Bafna, the Head of Research & Equity Strategy at Sunidhi Securities and Hemindra Hazari of hemindrahazari.com with CNBC-TV18. Ekta: ICICI Bank stock is down around 0.5 percent odd so there is no real dramatic reaction which has come in to the numbers. Do you think the worst is now factored in and your sense in terms of what they delivered as well? Nitin: In terms of non-performing loans (NPL) formation, it looks like we are amidst the worst. So, worst looks to be over. I would think that after having made such a high provision of Rs 36 million, I think the credit cost also could come down over the next year or this year. The stock has been pretty stable; probably maybe street is reading more on the performance next year and there has been some pressure on the stock over past few days after Axis Bank reported results. So, that is what is supporting the stock. Ekta: What is your sense in terms of why the support for the stock is coming through? Is it because maybe they finished their asset quality review (AQR), that has written off around Rs 4,000 crore this quarter odd and hence we could possibly expect better asset quality in FY17 because maybe iron and steel will also not see as bad a momentum as we have seen this year or do you think it is also to do with maybe the life insurance which could see a partial IPO this time? Nitin: I think it has more to do with the core banking performance. Life insurance though is significant but it is not as big a contributor to drive the performance of the overall bank in terms of stock price. I think the street is expecting that with some improvement in these troubled sectors and the overall economy looking up, we may be doing better in terms of asset quality going ahead. In terms of credit cost and slippages, we might have made a peak for the share. Reema: What if you have made of ICICI Bank and what would your expectations be in terms of asset quality from the bank in the coming year? Bafna: The results are slightly below our estimates, if will talk about the net interest income (NII) and the net interest margin (NIM) and especially on the slippages perspective because if you add back the SDR and 5:25, the slippages are to the tune of around Rs 9,000 crore, whereas we were expecting it will be in line with what was Q3 FY16 to be around Rs 7,000 crore, so slightly below our expectations on operational as well as on asset quality front, but going into FY17, it’s still pretty difficult to say confidently that the worst is over for the sector, because we are conducting z score analysis for last 5 years, considering the amounts of stress that is there in the system and that analysis suggest that stress in the system is around Rs 12 lakh crore and out of that roughly 50-55 percent has been accepted or accounted for by the Banks, so still a lot of pain has to go for, we might see few more AQRs from the Reserve Bank of India (RBI), so still it is at an nascent stage unless and otherwise the economic recovery picks up and we see what has happened in the steel sector because of this minimum import price (MIP), if it happens across the power, the roads and the other sectors then probably things could look up for the banking sector and so for ICICI Banks, but barring that if the economic recovery doesn’t turn out then what, probably we are thinking of then, for next 2-3 years these entire banking sector will take to clean up the books, we might see couple of more these sort of AQRs going forward. Ekta: So you are not confident in terms of the quarterly slippage run-rate in FY17, they have been averaging Rs 15-3,000 odd crore which was pre the AQR, you expect that to come back at least or do you expect it to worsen from those levels in FY17? Bafna: I don’t think, the kind of slippages that the ICICI Bank has shown in this year around, slightly more than Rs 15,000 crore slippages during FY16, I don’t think that will happen in FY17, but so to say the run-rate which was there in, let say FY14-15, I don’t think it is going back to those levels, so the probably what I feel is that Rs 180-200 is a level where ICICI Bank factors most of the negatives, because even if we assume out of this Rs 435,000 crore loan book roughly say, even Rs 30,000-40,000 crore book goes bad over next 2-3 years like what we have seen in case of Axis Bank. I think at Rs 180-200 level where ICICI Bank has seen some sort of support if we will talk about February levels, that is the worst were the price factors in, because our adjusted book value considering this complete stress works to be around worst case scenario around Rs 105 for FY17, so even if give let’s say 1-1.2 multiple it works out Rs 150-160 levels and then subsidiary valuation of Rs 60. So, broadly Rs 180-200, I see the best level for ICICI Bank to enter from a long term perspective and on the upside even we talk about, though my target price tends around Rs 260 considering FY17 numbers but it will roll forward to FY18 probably it will be may be Rs 20-30 higher, so we might see a band of Rs 200-300 for ICICI Bank at least for next 12 months perspective. Ekta: Your first thoughts and the fact that the slippages have come in at Rs 7,000 crore versus Rs 6,540 crore odd last quarter? Hazari: According to me this is the beginning, this is not the ending. Unfortunately, there is a section of the market which believes that this is a one-off event and they are looking at the pre-positioning profit number. The very fact that the analyst community was expecting Rs 3,100 crore and ICICI Bank declared a profit of Rs 702 crore just shows the severe underestimation that the analyst community has been doing and this has been particular for the new private sector banks. There has been this mistaken belief that these banks are somehow immune to the macroeconomic slowdown which has infected the government banks and this is the issue which will impact all the private sector banks which have a significant corporate portfolio because today it is the corporate portfolio which some of these banks are disclosing there is going to be another wave of agricultural bad debts, there is going to be another wave for SMEs, there is going to be another wave for small individual borrowers because the macroeconomic situation is extremely acute. It is unfortunate that the business community and the analyst community is not highlighting that and therefore such results come as a surprise. Ekta: This is also because of a special provision of Rs 3,600 crore that the bank has undertaken this quarter. So, may be this profit figure of Rs 700 crore might just be a one-off. We have seen this happen with other banks as well. Would you just consider it a kitchen sinking type of quarter for ICICI Bank and then we move on to a better cleaner FY17? Hazari: I think there are going to be many such kitchen sinking quarters in the quarters to come. I think one will be extremely ambitious if one were to say that this is only one single quarter of this bad event has happened. I have been saying this for some time now that the banking industry asset quality will be at worst because the asset quality of the new private sector banks also is going to get worst. One will be extremely adventurous to believe that this is only a one-off event. However, look at the state of the industry, look at the state of the macro, the sales growth of companies; there is hardly any sales growth happening. Today, all the companies that are focusing on their debtors recovery; there is no growth happening. Very few people are repaying their loans on the due date and this is reflected in the banking industry. After all the banking industry mirrors the Indian economy but unfortunately, when it comes to the new private sector banks, there seems to have been a disconnect between the economy which we operate in and their profits numbers. Ekta: Currently talking about valuations, ICICI Bank is currently at around 1.6 times price to book FY17. Do you think that is going to sustain those kind of valuations or there is a chance that it could move higher or lower? Hazari: If you look at 1.6 and you compare it to the government bank which operate well below 1, I think there is significant scope for it to go down. So only why some of these valuations are up is that government banks have been reporting such dismal numbers and since the weightage of financials are so high in indices, all the institutional investors are forced to go into these new private sector banks. Now the problem will come for them also that what will you do when you have to constantly be saying that these are one-off events and that the future will be better and take that view.