ICICI Bank is a buy: JM Financial

ICICI Bank reported Q2FY11 net profit at 1,240 crore, up 19% Y-o-Y . NII was ahead of expectation on margins improvement while non-interest income came lower despite strong fee income growth on treasury losses. Provisions declined 40% Y-o-Y on improving asset quality trend. The merger added a strong franchise with 463 branches taking the total to 2,501 branches and contributed 3% to loan book and 6% to deposits.

Bank Of Rajasthan also added 2,000 crore of Rural Infrastructure Development Fund (RIDF) bonds to the investments of ICICI Bank, taking the total investment in RIDF to 20% of the non-SLR book. These bonds generate 4.5% yield. BoR’s contribution at PBT level in Q2 is negligible.

NPAs declined 23 bps Qo-Q with coverage ratio improving to 69% even as provisions continued to decline. Going forward, turnaround in retail segment and strong macro economic outlook would drive improved delinquencies , resulting in sharp decline in adjusted credit cost from 183 bps in FY10 to around 75 bps in FY13E. ICICI Bank in its new form with significantly improved liability franchise and derisked balance sheet is ready for a new phase of prudent growth.