ICICI Bank’s December quarter results were better than expectations, and it appeared to be benefiting from a phase, when rising interest rates result in better yields on loans, as the cost of funds rises with a lag. It has also managed to improve its asset quality during the quarter, which is a positive sign.
ICICI Bank’s net interest income rose by 12% in the December quarter, over the same period a year ago, to Rs 2,312 crore, and is 5% up over sequentially, that is compared to the September quarter. NII is the difference between interest earned and interest paid. These are based on standalone figures.
The bank’s NII has risen faster than the 8.3% figure achieved in the September quarter. But its estimated net interest margin would be in the 2.5-2.6% range, around the same as in the previous quarter. (NIM is the net interest income divided by the interest earning assets of the bank).
The bank’s advances rose by about 15% to Rs 206,692 crore and savings deposits rose by 27%. The ratio of low cost deposits (current and savings accounts) has risen by over 4 percentage points to 44.2%. The faster growth in advances, relative to growth in interest income, could partly explain why its NIM did not improve significantly.
Its non-interest income –fee income, lease income and treasury income- has risen by 4.5%, relatively lower due to a decline in lease income.
But the bank’s operating expenses has risen by a sharp 27%, relative to the increase in income, which it attributes to an increase in its branch network and inclusion of Bank of Rajasthan’s financials, in full, in this quarter.
The sharp increase in expenditure meant that operating profit, before provisions, declined by about 1%. But its provisions for non-performing assets, at Rs 465 crore, were less than half of what it provided in the same period a year ago.
That allowed the bank the comfort of reporting a 31% increase in its net profit to Rs 1,437 crore and an increase of 16% sequentially.
ICICI Bank’s asset quality has shown a significant improvement. Gross non-performing assets were down by 9 basis points to 4.75%, as a percentage of advances, and also down by about 28 basis points sequentially. 100 basis points equals 1 percentage point. Net NPAs (after provisions) were down by a percentage point to 1.4%.
The bank also operates a number of subsidiaries in the financial services business, in sectors such as insurance, mutual funds and investment banking. Its consolidated net profit was up by 78% to Rs 4,525 crore during the December quarter, partly due to a change in accounting policy at its life insurance subsidiary. Adjusting for this, profit growth is lower, but still healthy, at 44%.
Segment analysis: Revenues from retail banking fell by 7% but loss also reduced to Rs 128 crore, from Rs 232 crore. Wholesale banking (to businesses) did well to support its performance, with income rising by 15% and profits by 22%. Its treasury operations too saw income rise by 11% while profit rose by 39%.
ICICI Bank’s share closed up by 1.7%, as investors would have been pleased by the steady growth in interest income, stable margin and better asset quality. Key to its performance now, is how it manages an increase in the cost of funds. Earlier, lending rates rose far ahead of a hike in deposit rates, but of late, deposit costs have risen significantly. These will feed into higher cost of funds, and if lending rates cannot be hiked enough to compensate, then the effect on margins may become visible in the coming results.