ICICI: profits up, shares down

ICICI Bank’s earnings report, out on Friday, met expectations. Yet the stock fell after the announcement – down 3 per cent to Rs1,142.2 by 3.45pm in Mumbai.

That bucked the trend in the sector which has seen a rally in recent weeks. Why?

For the three months ended in the March, ICICI reported net profits of Rs23.04bn ($424.5m), up from Rs19.01bn in the same period a year earlier, on total income of Rs125.73bn. Net interest income – the difference between the revenue generated by assets and the expenses associated with paying out liabilities – was up 22 per cent quarter-on-quarter to Rs38.03bn.

In the fiscal year just ended, ICICI’s net interest margin, an important performance indicator for banks, increased by 38 basis points to 3.11 per cent. And net profits came in at Rs83.25bn, up 29 per cent in the year.

Gautam Sinha Roy, vice-president equities at Motilal Oswal Securities, rated the stock “buy” and said in a note: “Pick-up in retail loans and working capital financing were the key drivers. [The] bank’s asset quality has been holding fairly well over the past few quarters and we expect it to continue, Tier-1 capital adequacy of 12.80 per cent keeps the bank well poised for strong growth a declining rate environment.”

This fourth quarter report does exceed expectations. In a Reuters poll of analysts, the average forecast for full year net profit was Rs22.84bn. So, why the subsequent drop in shareprice?

Vaibhav Agrawal, a banking analyst at Angel Broking told beyondbrics: “On the face of it the results are what we expected. But we are waiting for more information on the restructuring of loans and to see if it is higher than Rs9bn to Rs10bn indicated by management in the conference call at the end of the last quarter.”

In the conference call that followed, it emerged that ICICI’s restructuring did, in fact, rise 16.5 per cent in the quarter, with provisions up 24.7 per cent quarter-on-quarter to Rs4.6bn.

Debt restructuring is a big concern for India’s banks. As James Crabtree wrote for the FT last year:

Analysts have been… worried about a sharp increase in gross non-performing assets, which rose from 2 per cent a year ago to 3.4 per cent at the end of the last quarter. Debt restructuring between lenders and borrowers is on the rise, too – zooming up threefold in the past year to Rs680bn ($12bn) – raising analysts’ suspicions that banks are using these agreements to fudge the true level of their bad debts.

But Agrawal also offers a second possible explanation for the fall in ICICI’s stock: “the fall in share price could be to do with profit taking after the rally we have seen with banking stocks in the past few weeks.”

The stock has gained 11.8 per cent in the past month, outperforming the benchmark Nifty index which has gained just 4.1 per cent to 5,873.5.

Maybe it’s just as simple as that.

Related reading:
ICICI and Ecobank forge alliance, FT
India’s banks face balance sheet decline, FT
India banks – more quantity than quality, FT