ICICI Bank to benefit from improved asset quality, healthy loan growth

Lower provisions, healthy margins, and steady advances drive ICICI Bank's performance; management expects NIMs to remain stable in coming quarters

ICICI Bank delivered satisfactory results in the second quarter of 2025-26 (Q2FY26), sustaining return on assets (RoA) of around 2.3-2.4 per cent and improving asset quality. Provisions declined 26 per cent year-on-year (Y-o-Y) and 50 per cent quarter-on-quarter (Q-o-Q). Deposit costs have declined 36 basis points (bps) in the first half of the financial year (H1FY26), enabling 3 bps Q-o-Q expansion in adjusted net interest margin (NIM).

 

The Q2FY26 net profit grew 5.2 per cent Y-o-Y to ₹12,360 crore due to lower provisions and strong margins. The net interest income (NII) was up 7 per cent Y-o-Y and flat Q-o-Q at ₹21,530 crore. Advances grew 10.3 per cent Y-o-Y and 3.2 per cent Q-o-Q. Deposits were flat Q-o-Q and up 7.7 per cent Y-o-Y, while CASA (current account savings account) mix was 40.9 per cent. 

Fresh slippages declined to ₹5,030 crore (versus ₹6,250 crore in Q1FY26). The gross non-performing assets (GNPA) ratio dropped to 1.58 per cent while net NPA ratio declined to 0.39 per cent. The gross annualised slippage ratio declined to 1.43 per cent, down 39 bps sequentially and 16 bps Y-o-Y. Credit costs declined 27 bps Q-o-Q and 13 bps Y-o-Y to 0.26 per cent. Where ECL (expected credit loss) transition is concerned, the management does not expect the impact to be material. However, the exact impact on credit costs has not been assessed yet since the new norms are still under draft.

 

Management expects range-bound NIMs for the next two quarters. Other income declined 11 per cent Q-o-Q to ₹7,580 crore due to lower treasury gains in Q2FY26 while fee income was healthy. The operating expenditure rose 12.4 per cent Y-o-Y (3.6 per cent Q-o-Q) to ₹11,800 crore, and the cost to income (C/I) ratio increased to 40.6 per cent (up 276 bps Q-o-Q). The PPOP (pre-provision operating profit) declined by 8 per cent Q-o-Q to ₹17,290 crore.

 

The business segment, which contributes 21 per cent of the book, saw advances accelerate to 24.8 per cent Y-o-Y (6.5 per cent Q-o-Q) to ₹2.909 trillion. Retail, which is 58 per cent of the loan book, grew by 2.4 per cent Q-o-Q to ₹8.171 trillion. Within retail, growth was led by credit cards, which grew 8.8 per cent Q-o-Q to ₹58,800 crore, and mortgages grew by 2.8 per cent Q-o-Q to ₹4,606 crore.

 

The CASA ratio declined 35 bps Q-o-Q to 40.9 per cent but the average CASA mix improved 50 bps Q-o-Q to 39.2 per cent. Management expects traction in retail to sustain. Deposits grew by 0.3 per cent Q-o-Q and by 7.7 per cent Y-o-Y to ₹16.128 trillion, led by saving accounts deposits, which grew by 1.4 per cent sequentially to ₹4.521 trillion followed by term deposits, which grew by 0.9 per cent Q-o-Q to ₹9.540 trillion.

 

Management has identified transaction banking as a future growth area along with deepening synergies in the corporate ecosystem. Activity in the corporate space may reflect higher transaction fees, rather than loan growth.

 

The GNPA additions from the retail and rural portfolios were ₹4,049 crore in Q2FY26, compared to ₹5,193 crore in the previous quarter and ₹4,341 crore in Q2FY25. Provisions declined 49.6 per cent Q-o-Q (25.9 per cent Y-o-Y) to ₹910 crore. The bank also holds contingency provisions of ₹13,100 crore.

 

The NIM reflects benefit from reduction in deposit rates and cost of borrowing as well as the impact of repricing of external benchmark-linked loans and investments. Of total domestic loans, interest rates on about 55 per cent of the loans are linked to the repo rate and other external benchmarks, 14 per cent to MCLR (marginal cost of funds-based lending rate), and the remaining 31 per cent of loans have fixed interest rates. The management expects margins to remain rangebound for FY26. It is comfortable with current loan-to-deposit ratio (LDR) levels and believes liquidity could climb due to CRR (cash reserve ratio) cuts.

 

The current pace of growth in operating expenses (opex) is not expected to sustain. Fees from retail, rural and business banking customers constituted about 78 per cent of the total fees, and there was sequential 10 per cent growth in fee income to ₹6,490 crore.

 

Healthy loan growth and strong asset quality are competitive advantages. ICICI’s valuations will also include a significant allocation for its many high-value subsidiaries and associates. A potential management transition may pose valuation concerns.