ICICI Bank’s QIP credit positive: Moody’s

Lending major ICICI Bank’s allotment of shares via qualified institutional placement (QIP) to raise Rs 15,000 crore in equity capital is credit positive, Moody’s Investors Service said on Thursday.

In a news and analysis note, it said the allotment will improve the bank’s capital position.

“This is an important development because the ongoing economic slowdown exacerbated by the disruptions from the coronavirus outbreak, will have a negative effect on the bank’s asset quality and pressure profitability and capital,” the note said.

“We estimate that the capital raise will result in a 170 basis points in the consolidated Common Equity Tier 1 (CET1) ratio from 13.4 per cent at the end of June 2020, after including profit for the June quarter.”

In addition to this equity raise, the bank also raised additional capital through a part sale of its subsidiaries.

In June 2020, it sold a 1.50 percentage point stake in ICICI Prudential Life Insurance and a 3.96 percentage point stake in ICICI General Life Insurance, collectively raising Rs 30.9 billion.

The bank still retains majority ownership in these two entities.

“The bank has also been making forward-looking credit provisions for potential asset-quality stress driven by the coronavirus driven economic disruption,” the note said.

“Such provisos now amount to 1.3 per cent of loans, which is amongst the highest within the rated Indian banks. Although the countrywide lockdown in India has been lifted, economic activity is still subdued, and daily infections of coronavirus remain high.”

As a result of these disruptions, “we estimate that GDP in fiscal 2020 (ending March 2021) will contract by four per cent”.

“This will be the weakest economic performance in the past four decades and will have a significant near-term effect on the cash flow of bank borrowers and, consequently, their ability to repay loans. We expect that the most affected loan segments will be retail and small and medium-sized enterprises,” the note said.

“As is the case with other rated private sector banks, ICICI has a large exposure to retail loans which account for 63 per cent of its loan book, including agriculture loans, a key risk.”

Consequently, the enhanced capital buffers will support the bank’s credit profile in these times of economic uncertainty.

Additionally, the bank’s core profitability buffer remain strong with pre-provision income (adjusted for one-off gains) for the quarter ending June 2020 at 2.5 per cent (annualised).

“The bank also has profitable stakes in its subsidiaries, most notably in insurance companies, which can be liquidated if unforeseen capital needs arise, although this is not part of our basecase scenario.”

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