ICICI Bank: retail, rural portfolio stress spikes
The bank increased the retail and rural loan portfolio by 11% year-on-year but this was accompanied by a 17% growth in fresh defaults.
If loan defaults are growing faster than loan growth for any bank, it is a sign of worry. Take ICICI Bank, for instance. It increased the retail and rural loan portfolio by 11% year-on-year (y-o-y) in the December quarter (Q3FY25). Yet, this was accompanied by a 17% growth in gross non-performing asset (NPA) additions or fresh defaults in the segment.
Contrast this with the corporate and business banking (CBB) loan portfolio, which grew by 21% and saw a drop in gross NPA additions. The trend in CBB’s gross NPA additions has been stable at about ₹800 crore quarter-on-quarter (q-o-q). Overall, ICICI’s gross NPA ratio trend shows improvement, with a linear decline to 1.96% in Q3FY25 from 2.3% in Q3FY24.
ICICI has achieved q-o-q stability in net interest margin at 4.25%. However, in a media interaction after the Q3FY25 results, the bank’s management reiterated the obvious fact that a lower interest rate regime is negative for banks as far as NIM is concerned.
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Why does a low interest rate hurt a bank’s profitability? One, a bank’s net worth that has no interest cost starts earning less interest income. Two, a bank does not benefit from lower deposit rates on its total deposits as it anyway pays no interest on current account deposits and low interest on savings account deposits. Three, loans get repriced faster than deposits, with many loans being on a floating rate. As the Street is aware, investors are already bracing for the negative impact of any rate-cutting cycle by the Reserve Bank of India (RBI) as and when it begins. That is the time when the trough level of NIM will become clear.
Notwithstanding the stress in the bank's retail and rural loan portfolio and the likely macro headwind of lower rates, ICICI’s overall performance remains strong. Net interest income (NII) and core fee income grew y-o-y by 9% and 16%, respectively. Operating expenses increased by just 5%, which meant a solid gain of 15% in core pre-provisioning operating profit to ₹16,007 crore.
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The most noticeable aspect of cost is that employee expenses have fallen by 5% each in the past two consecutive quarters to ₹3,929 crore. During the call with analysts, the management pointed out fluctuation in provision for retirement and headcount as the reasons. However, they refused to share headcount reduction data, saying that it would be shared annually. The bank’s annualized return on assets (RoA) at 2.36% for Q3FY25 is the highest among the top four private sector banks, including HDFC Bank, Axis Bank and Kotak Mahindra Bank.
The bank’s advances growth was in line with its deposit growth at 14%. This means the loan-deposit ratio remained at 86%, which is a sweet spot as a ratio above 90% indicates aggressiveness and below 80% suggests conservativeness.
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As the bank’s profit growth has been healthy, it leads to a virtuous cycle of boosting the common equity tier-I (CET 1) ratio that obviates the need for raising fresh capital for growing the loan book. The FY25 profit has managed to increase CET 1 to nearly 16% from 14%.
ICICI Bank’s superior return ratio compared to other leading private sector banks has helped the stock gain 21% in the past year, beating the Nifty Private Sector Bank Index, which is up 3%. Even after the outperformance, brokerages remain positive on the stock. Yes Securities has a target price of ₹1,500 per share for the bank including ₹234 per share as the value of subsidiaries.
The author holds a position in ICICI Bank.
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