In a conference call after the results were announced on Thursday, Chanda Kochhar, managing director of ICICI Bank Ltd, said: “We’ve turned the corner and resumed growth.” The headline financial numbers for the quarter ended March perhaps justify her statement. Net interest income grew 23% from a year ago, the best in 18 quarters and its net profit gained 44%, the most in at least 25 quarters. Net interest income is the difference between interest earned and interest paid.
The bank has even managed to improve its net interest margin (NIM) to 2.7%, up 10 basis points from a quarter ago. NIM was boosted partly by the increase in low-cost current and savings accounts to 45.1% of total deposits. NIM represents the spread earned by a bank on its interest-earning assets.
However, the bank’s operating income declined by 4%. That was a due to a 13.2% decline in the non-interest income, on the back of losses from treasury income and an increase in expenses. Ergo, the entire increase in net profit was due to a 61% cut in provisions. The bank was able to afford that due to improving asset quality.
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Provisioning cover is at a strong 76%. Net non-performing assets as a portion of net customer advances was 1.11% at the end of March, lower than a quarter ago. ICICI Bank has also reduced the relatively higher-risk credit card and personal loans, made during the heydays of the previous bull run, to 3% of its advances.
Can it sustain these numbers? Interest rates are rising and not only could that dampen loan growth, the bank will find it difficult to protect margins, let alone expand them. It’s not as if Kochhar has been all that aggressive in ramping up loans. Advances increased some 4.68% during the March quarter, about the same as the whole sector. That was also the lowest quarterly growth in the past nine months and is a reflection of credit growth tapering off for the entire industry.
Even in the current fiscal, the management says that it will target the industry rate of loan growth, or about 20%. That is not hugely different from the 19% loan growth in fiscal 2010-11.
That indicates that stability is still a priority for the bank. While that may well help ICICI Bank post decent growth numbers, it also limits further upsides in the stock, especially since the turnaround story is yesterday’s news.
Graphic by Sandeep Bhatnagar/Mint