ICICI Bank: Quality should translate into growth numbers

Improving asset quality and rise in the base of low-cost deposits were the key highlights of ICICI Bank’s June 2010 quarter results. Investors can draw solace from the fact that the bank is inching towards a more robust business model with every passing quarter.

The bank’s bad assets had peaked in December 2009 quarter, as net non-performing assets (NPAs) formed 2.4% of advances in that quarter. Since then, net NPAs are on a steady decline, as it touched 1.6% of advances in the June 2010 quarter.

In fact, this is the first time in the past seven quarters that the bank has reported net NPAs under 2%.
That said, the bank still has one of the highest NPAs in percentage terms among large banks.

The difference in the asset quality can be borne from the fact that it’s nearest private sector rival — HDFC Bank — reported just 0.3% of advances as net NPAs in the June 2010 quarter. This shows that the asset quality-related concerns would weigh heavily on the management’s mind even in the coming quarters.

Though the bank posted a 17% year-on-year growth in net profit in the June quarter, that was more due to the low base in the year-ago period. The bank has been averaging a profit figure of around Rs 1,000-1,100 crore in the past few quarters. Since it reported a profit of Rs 1,026 crore in the June quarter, it is clear that the growth in real sense is still hard to come by.

The most salient feature of the results was the bank’s low-cost current and savings account (CASA) balances, which stood at 42.1% of the total deposits in the quarter. Its CASA ratio has consistently improved in the past seven quarters. However, a part of the improvement can also be attributed to the shrinking deposit base.

A higher share of CASA balances in its total deposits has boosted the bank’s net interest margin (NIM), which jumped by 40 basis points compared to the year-ago period. NIM is a measure of spread between the cost of borrowing and yield on loans.

NIM stood at 2.8% in the June 2010 quarter. This is where the bank has clearly deviated from its earlier strategy. A few years ago, it was a volume player with lesser focus on NIM. Today, its NIM is hovering around the respectable 3% mark.

ICICI Bank has performed well on the quality front. However, it is important that the quality also results in growth. With fundamentals coming back into shape, investors can be optimistic.