ICICI Bank's profitability solid despite AIF provisioning, margin pressure

Ratings agency S&P said that the bank's better customer profile and underwriting compared to many Indian banking peers should also limit losses

Indian private sector lender ICICI Bank (BBB-) is expected to maintain healthy earnings despite a rising cost of funds and a one-time hit from provisions on alternative investment funds (AIF), according to S&P Global Ratings.

The rating agency stated, "Robust credit growth and low credit costs support our earnings forecast (a return on assets of about 2.0 per cent). Credit growth is likely to remain strong at 17-20 per cent. We do not anticipate a material decline in the growth of unsecured retail loans due to higher risk weights being applied by the regulator."

The pricing of unsecured retail loans has marginally increased by 20 basis points (bps) to 30 bps and, therefore, appears unlikely to slow down the rapid growth. "The bank witnessed a 35-40 per cent year-on-year increase in its personal loans and credit cards portfolio, and we expect the strong growth momentum to continue," it added.

The bank's net interest margins (NIMs) are likely to decline by about 10 bps over the next quarter, as the cost of deposits could rise further. This increase results from the delayed repricing of deposits, a shift from low-yielding current and savings accounts to higher-interest-bearing term deposits, and heightened deposit competition in India's banking sector to meet credit demands.

S&P stated that the bank's NIMs contracted by 10 basis points (bps) for the quarter ending December 31, 2023, due to the majority of new deposits being higher-yielding term deposits. Wholesale deposit rates have also risen amid tight liquidity.

Provisioning costs are expected to remain low at 60 bps-80 bps of loans, thanks to the improved operating environment. Provisions were slightly higher at 0.4 per cent of advances for Q3 FY24 compared to 0.2 per cent for the previous quarter. This increase was mainly due to a one-time provision on AIF to comply with recent regulations. The overall impact of this hit was small, at 4 per cent of the bank's profit before tax for the quarter. This was in line with other private-sector banks like HDFC Bank and Kotak Mahindra Bank, where the impact was 3-6 per cent of profit before tax.

Furthermore, ICICI Bank's asset quality remains stable, keeping provisioning requirements contained. Risks in unsecured retail loans are relatively well managed, given that the majority of these loans are to existing customers. Moreover, 85 per cent of personal loan and credit card loans are to salaried individuals, with 75 per cent employed by highly-rated corporations, multinational corporations, and government entities, limiting the risk of job losses.

The management possesses the skills and capabilities to maintain asset quality amid the bank's high credit growth. The bank's better customer profile and underwriting compared to many Indian banking peers should also limit losses, the rating agency added.