ICICI Bank: Declining provisions continue to aid profit growth

A moderation in net interest income (NII) and fee income growth and high operating expenses led to an operating profit growth of 6 per cent year-on-year for ICICI Bank in the second quarter.

This growth was the highest in six quarters. This is the first comparable quarter as Bank of Rajasthan was merged with ICICI Bank in August 2010.

Even as ICICI Bank witnessed a single-digit operating profit growth, the net profit growth was 21.6 per cent, thanks to provisions, which declined (year-on-year) for the sixth quarter in a row. Provisions declined by 50 per cent year-on-year.

Advances grew by 20 per cent year-on-year, but net interest income growth was more in-line with the balance sheet growth of 13 per cent year-on-year. The reason being, the net interest margins were similar to what they were in September 2010 quarter. Net interest margins were at 2.6 per cent in the September 2011, June 2011 and September 2010 quarters.

So what led to the similar NIMs?

The yield on investments, staying flat, did not support the sequential improvement of September quarter's yield on advances by 40 basis points. This more or less offset the rise in cost of funds by 20 basis points, leading to margins being maintained at similar levels.

The CASA ratio continues to be at impressive 42 per cent, which is encouraging. ICICI Bank's last base rate hike in mid-August will aid yield in upcoming quarters. However, the cost pressures from savings rate de-regulation may partly offset the yields.

Operating expenses grew at 20 per cent driven mainly by employee costs, although the bank added only 32 branches in a year. Last year, the bank's branch network jumped by 18 per cent following the merger with Bank of Rajasthan's branches.

Asset quality, in line with other private banks, improved with gross NPA ratio falling from 5.03 per cent to 4.14 per cent year-on-year. After provisioning, the Net NPA ratio at 0.93 per cent shows that the bank's initiatives to contain asset quality pressures over the last few years have paid-off. While GNPA ratio witnessed moderation sequentially, the restructured asset portfolio spiked mainly due to MFI restructuring. The restructured asset proportion to total advances is at 1.06 per cent as against 0.9 per cent in June 2011.