ICICI Bank (IBN) Down 4% As Provisions Hit Q4 Earnings

ICICI Bank Ltd. (NYSE:IBN) was down nearly 4% on NYSE following the release of fourth-quarter fiscal 2016 (ended Mar 31) results due to concerns over weak global economic environment that led the company to undertake ‘prudent measure’ to account for future increase in delinquencies. In one of the worst quarterly results in a decade, the company’s net profit declined 76% year over year to INR7.02 billion ($106 million).

Results were adversely impacted by additional contingency reserve as well as increase in expenses. However, higher revenues, improved loan and deposit balances and strong capital ratios were the tailwinds.

Details

Net interest income grew 6% year over year to INR54.04 billion ($816 million). Non-interest income was INR51.09 billion ($771 million), surging 46% from the prior-year quarter. The reported quarter included gains of INR21.31 billion ($322 million) from sale of stakes in ICICI Lombard General Insurance Company and ICICI Prudential (LON:PRU) Life Insurance Company.

Operating expenses totaled INR34.06 billion ($514 million), increasing 10% year over year. Further, the cost-to-income ratio was 32.4%, down from 36.2% recorded a year ago.

ICICI Bank’s credit quality continued to worsen. As of Mar 31, 2016, net nonperforming assets were INR132.97 billion ($2 billion), increasing significantly year over year. Further, provisions increased substantially year over year to INR33.26 billion ($502 million).

Weak global economy and ‘gradual nature of domestic economic recovery’ had an adverse impact on certain sectors including iron and steel, mining, power, rigs and cement. So, in order to work out a solution, the company made a contingency and related reserve of INR36 billion ($543 million) in the reported quarter for its exposure to the above-mentioned sectors. Notably, this is in addition to the provisions made per Reserve Bank of India (RBI) guidelines.

As of Mar 31, 2016, ICICI Bank’s total advances amounted to INR4,352.64 billion ($65.7 billion), up 12% year over year. The rise was mainly driven by a robust growth in the retail segment, with a 23% year-over-year increase in total retail loan portfolio.

ICICI Bank’s total deposits rose 17% from the prior-year quarter to INR4,214.26 billion ($63.6 billion) as of Mar 31, 2016. Moreover, as of the same date, the current and savings account (“CASA”) ratio came in at 45.8%.

In compliance with the Reserve Bank of India's guidelines on Basel III norms, ICICI Bank's capital adequacy was 16.64% and Tier-1 capital adequacy was 13.09% as of Mar 31, 2016. Both the ratios were well above the minimum requirements.

Our Take

We believe that the company’s increased dependence on domestic loans, focus on improving fee income, a stable fund base and market leadership in the insurance business will continue to generate synergies. Also, the company will continue to expand in India and other overseas locations.

However, a highly competitive operating environment, continuously rising expenses, deteriorating asset quality and stringent regulatory requirements will likely dampen ICICI Bank’s financial performance.

At present, ICICI Bank carries a Zacks Rank #3 (Hold).

Other Foreign Banks

HDFC Bank Ltd. (NYSE:DB) reported fourth-quarter fiscal 2016 (ended Mar 31) net profit of INR33.74 billion ($0.50 billion), up 20.2% year over year. Quarterly results continued to reflect top-line growth with improvement in both net interest income and non-interest revenues. However, elevated operating expenses as well as provisions marginally weighed on the results.

Deutsche Bank AG (NYSE:DB) reported net income of €236 million ($260.3 million) in the first quarter of 2016, down 57.8% year over year. The quarterly results were impacted by lower revenues and higher provisions. However, the reduction in non-interest expenses was a positive factor.

HSBC Holdings (LON:HSBA) plc (NYSE:HSBC) is scheduled to announce results on May 3.


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