The questions investors wanted answered from the ICICI Bank Ltd results were: 1) Is the bank going to return to growth soon? 2) Are there signs that bad loans at the bank are going down? 3) Is the proportion of low-cost deposits increasing? The answers are no, no and yes.
ICICI Bank’s strategy of balance sheet contraction continued during the June quarter, with its balance sheet shrinking by 6.8% compared with the year-ago period and 3.1% compared with end-March. The management said, though, that it intends to expand assets by 5% this fiscal but the growth will occur only during the second half.
Like most other banks, ICICI Bank’s profits during the June quarter were boosted by a big increase in treasury profits, which included equity gains, a write-back in its credit derivative portfolio, a reversal of mark-to-market losses on its equity portfolio and gains in its fixed income book. Both fee income and net interest income showed negative growth year-on-year (y-o-y). There were substantial savings in operating expenses, though. The outcome was a 47.5% rise in operating income. But if we leave treasury gains and losses out of the calculation, ICICI Bank’s core operating profit was lower compared with the year-ago period.
Net interest income was negative because of the bank’s strategy of limiting asset growth, as a result of which its advances declined by 11.6% y-o-y and 9% from 31 March. The net interest margin was at 2.4%, a bit lower than the 2.6% notched up in the March quarter, but that was on account of low-yielding agricultural advances given at the end of the previous quarter, the impact of which was felt in the June quarter. The high level of liquidity in the balance sheet as a result of the bank’s decision to go slow on asset creation was also a reason for lower margins.
Gross non-performing assets did come down slightly at the end of June compared with end-March, but that doesn’t take into account the Rs1,100 crore worth of assets written off and also bad loans sold to Asset Reconstruction Co. (India) Ltd. Outstanding restructured loans during the quarter came down because while Rs1,450 crore of loans were restructured during the quarter, another Rs3,238 crore were upgraded, which left net restructured loans at Rs4,146 crore at the end of June. If you add gross non-performing assets with restructured loans, the total weak assets tot up to 7% of the bank’s loan book.
The silver lining in the bank’s results is the higher proportion of low-cost current and savings accounts (CASA). CASA was 30.4% of deposits at end-June compared with 28.7% at end-March. Paras Jain / Mint
The silver lining in the bank’s results is the higher proportion of low-cost current and savings accounts (CASA). CASA was 30.4% of deposits at end-June compared with 28.7% at end-March.
Provisions were much higher during the quarter compared with the year-ago period, but the management said that that’s mainly due to a Rs200 crore restructuring provision on a large power project.
Investors looking for a quick turnaround of the bank are likely to be disappointed. The management says that fee income will pick up only in the third and fourth quarters and that there will be more restructuring in the next few quarters. But the repricing of wholesale deposits will occur during September and October this year and that will improve margins. Provisions on a quarterly basis should also start going down in the second half of the year. The management also hopes that expenses will remain at the same level as last year, although 580 new branches will be added this year. As for ICICI Prudential, the goal continues to be for break-even in fiscal 2011.
The ICICI Bank stock has done better than the Bombay Stock Exchange Bankex since March, mainly because it has rebounded from the absurdly low levels it had plumbed earlier. That outperformance may not continue, because although the bank is mending itself, it will take time to work off its earlier excesses.
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