The country's largest private sector lender, ICICI Bank, toed a strict line this quarter as it focused on healthier outlook to its banking model. It strengthened its low cost deposit (CASA) franchise, capped operating expenses and reinforced its Tier I capital in Q3FY10. It also saw fewer fresh non-performing loans this quarter and is expected to see quality improve slowly as it has ring fenced its loan portfolio (down 6 per cent sequentially over the previous quarter).
However, with its retail loan book down 6 per cent and international advances down 10 per cent, net interest income growth was muted at 3.4 per cent during the recently concluded quarter and 1 per cent sequentially to Rs 2,058 crore. The bank reported a 13 per cent year-on-year (y-o-y) dip in after tax profits to Rs 1,101 crore as a result.
CASA (low cost deposit) ratio has improved nicely to nearly 40 per cent of total deposits, increasing 270 bps quarter-on-quarter (q-o-q). However, given the bank’s higher proportion of non-deposit funding, CASA clocks in at a lower ratio of 25 per cent of total domestic assets, as per analysts. Positioned against expected growth, CASA ratio should come down.
Net interest margins were up 20 bps y-o-y to 2.6 per cent in the quarter compared to 2.5 per cent in the previous quarter. The outlook here isn’t clear as while funding costs should come down going ahead, the bank currently enjoys a higher share of high yielding advances (typically, lower rated in terms of quality or unsecured loans) but given its conservative thrust and impetus towards reducing risk on its loan portfolio, this higher yield may not sustain and therefore margins could be under pressure.
The portfolio quality has made improvements. Fresh NPL formation is down to Rs 750 crore for this quarter from the quarterly average of Rs 1,100 crore and the peak of Rs 13,500 crore in Q1FY10.
As the unsecured portfolio is reduced, the slippage should come down from the 1.8 per cent levels currently. Provisioning is down marginally to Rs 1,000 crore from Rs 1,070 crore last quarter and the credit costs will come down, say analysts, as quality of the book improves. Gross nonperforming loans have decreased on an absolute level while net NPLs were flat y-o-y on an absolute level even a smaller loan book makes ratios look worse.
With Tier I capital at a healthy 14.1 per cent, the bank has adequate strength to fund growth in the future. This is expected to get kick-started in FY11 with revenue growth following.
The stock closed at Rs 845 today, down 1.45 per cent and trades at a valuation of about 1.7x analyst estimates of FY12 book value per share.
