ICICI Bank improves margins, keeps check on asset quality

NIMs expand sequentially as margins in the global business improve 20 bps

It is not just the information technology and pharmaceutical companies that are springing surprises with their second quarter results. Even though the quarter started on a rather challenging note for the banking sector with the Reserve Bank of India (RBI) increasing short-term interest rates, ICICI Bank has managed to surprise the Street on most counts. The bank has managed to grow its loan book and fee income, expand net interest margins (NIMs) and keep asset quality stable. The cautious stance on credit growth since the credit crisis in 2008-09 has helped the lender keep a check on its asset quality.

Even after accounting for its mark-to-market provisions of Rs 279 crore on its investment portfolio, the bank has reported a 20 per cent year-on-year (y-o-y) growth in net profit during the second quarter to Rs 2,352 crore. This has been largely driven by lower operating costs and better margins. Even as other banks have seen their net interest margins decline, ICICI Bank's NIMs have expanded by four basis points (bps) sequentially and 31 bps annually to 3.31 per cent. While domestic NIMs remained stable, those for the international business expanded by 20 bps sequentially to 1.80 per cent. Rikesh Parikh, vice-president (markets strategy and equities) at Motilal Oswal Securities, the bank has been able to protect its NIM in tough market conditions, which is a big positive. Analysts say the stock is trading at an adjusted book value of 1.5x and there is still some upside left from here on.

The profit figures could have been better had the company chosen to stagger its marked-to-market provisions on its investment portfolio over three quarters, as has been allowed by RBI. The bank has fully recognised the mark-to-market provisions of Rs 279 crore on its investment portfolio in the second quarter. The bank's operating profit excluding treasury increased 31 per cent y-o-y to Rs 3,967 crore.

The rise in the fee income and reduction in operating expenses further gave a leg-up to the bank's overall profitability. Fee income increased by 17 per cent to Rs 1,994 crore, y-o-y, cost to income ratio declined to 37.3 per cent in the second quarter from 41 per cent in the year-ago period.

On the asset quality front, analysts say gross non-performing assets remained stable sequentially, as the bank may have written off a higher number of loans during the quarter. Vaibhav Agarwal of Angel Broking says: "Net NPAs, on an absolute basis, increased 9.5 per cent sequentially (as provision coverage ratio came off by 230 basis points quarter-on-quarter (q-o-q) to 73.1 per cent). The bank has restructured loan book increased 15 per cent q-o-q to Rs 6,826 crore, which is in line with management guidance."