Aim to keep NIMs above 3%, loan growth of 20%: ICICI Bank

India’s largest private sector lender, ICICI Bank, today delivered a positive surprise to analysts with a 36% growth in net profit for the first quarter of FY13. However, the highlight of the bank’s numbers was the improvement in its net interest margin (NIM) from 2.6% to 3% for the same period last year.

Speaking at a press conference, MD & CEO Chanda Kochhar says that growth in NIMs is because of improvement in margins from both the domestic and international business. “On the domestic side, the yield earning assets have gone up both on investments as well as on loans. On the international side, our NIMs have improved to 1.6% which were 1.52% in the last year or rather the fourth quarter of the last year,” she explained. She further adds that now that they have breached the 3% mark, they aim to maintain that level for the rest of the year. She also says that they stick to their loan book growth target of 20% for FY13. For the past quarter, total loan book grey by 22%, of which during the domestic corporate loans grew by 28% and the retail book by 10%. Below is an edited transcript of the interview at the press conference. Q: Your restructured asset portfolio has come down in this quarter and that was primarily because of the Kingfisher asset. Going forward, what is the kind of outlook you have given the fact that companies like Lanco or may be GVK or GMR may also come to restructure assets and you have exposure to these companies as well? A: Without talking of specific exposures, I would say that as of now our pipeline of restructured assets is very small. So I do not expect very large increase in the restructured portfolio this year. Q: Can you give us a break up of the loan book in terms of retail and commercial loans? A: Our total loan book growth is 22% during the quarter on a year on year basis. Within that, the domestic corporate loans have grown by 28% and the retail book has grown by 10%. Q: What’s the margin outlook for FY13 and what has driven it in this quarter? A: What has driven the growth in margins is of course an improvement both on the domestic side as well as the international side. On the domestic side, the yield earning assets have gone up both on investments as well as on loans. On the international side, our NIMs have improved to 1.6% which were 1.52% in the last year or rather the fourth quarter of the last year. So it’s a continued focus on cost of funding, improving the yields on assets and therefore improving the NIMs both on the domestic and the international side. The outlook for the year is that having crossed now the threshold of 3% we will definitely continue to operate at 3% or above. Q: What is your outlook for the international subsidiaries going forward? Given the sort of growth outlook that we have, especially in Canada and the UK, could a stake sale or some sort of an exit be in the pipeline for ICICI Bank? A: Actually our operations in the international subsidiaries continue to remain quite stable. As far as the size of the subsidiaries is concerned, there was a slight marginal decline in dollar terms, but the profitability continues to remain pretty stable. The previous quarter we got the dividend from ICICI Bank UK, this quarter we have got the dividend from ICICI Bank Canada. We will continue to follow our strategy of focusing on the India linked businesses, but we are not really talking of stake sale. But as I had mentioned earlier, we have a lot of capital in these subsidiaries and our capital adequacy in both these subsidiaries is in excess of 30% currently. So over the medium-term we would look at bringing back some amount of capital, but in a way the first step towards that is actually receiving the equity dividend which we have received both from UK and Canada. Q: So essentially you are expecting some capital coming in next quarter. Can you give an estimate of how much? A: No, I didn’t say next quarter, I said over a medium-term. That is over a two year period we should see some amount of capital coming back from the subsidiaries. But in a way, receipt of equity dividend itself is actually getting back some return on the equity capital. _PAGEBREAK_ Q: In terms of the local subsidiaries, more specifically life and general insurance, we have seen both of them making profits this quarter. Going forward, what kind of contribution do you expect from all of your subsidiaries and is there a plan to monetise any of these subsidiaries? A: All our subsidiaries continue to generate healthy profits. Of course each of them operates in their own business environment and growth, therefore it is calibrated in terms of how their own respective businesses move. As I mentioned, the life insurance subsidiary has seen a profit of about Rs 349 crore. That company now gives us almost 28% return on equity and in terms of giving us return on the capital employed. The outlook is that the life insurance company will have healthy profits for the year. The general insurance company will also be profitable, though of course we have to remember that at the end of the year for the next two years there is some more amount of the third party pool adjustment that has to be done as per the past regulations. But even taking that into account, it will be profitable operations. Q: I would like to get a view in terms of interest rates going forward, given the kind of cost of funds and the liquidity scenario. A lot of bankers had been asking for a CRR cut but of late that seems to be off the table. What you are expecting from the policy statement and what kind of an environment do you expect for interest rates for the rest of this year? A: Actually the liquidity situation systemically has improved substantially, and this was our belief in April itself. We were expecting that the situation would correct as the year goes past. As far as the policy rates are concerned, I guess the RBI has made it very clear that they are going to balance whatever is happening with regard to inflation, growth and so on. But I think talking specifically about lending rates, the lending rates for banks clearly depend on the cost of funds. As we saw our cost of funds coming down, we were almost one of the first banks to reduce our base rate itself by 25 bps a few months ago, and clearly that benefit we have already passed onto all our customers including the existing customers. Q: Provisions have been flat so how do you see it panning ahead in the quarters coming? A: We actually have been saying that our provision cost for the year should be within 75 basis points of the total loans. This quarter it was about 71 basis points, and I think it will be in that range. Q: We have seen a loan growth of 22%. Where is that coming from, which segments? A: Loan growth is coming in the retail side; it’s all mortgages, car loans as well as commercial vehicle loans. Then of course the international loans and advances that we have from the branches have also grown a little bit in dollar terms, but much more in rupee terms because of the change in the exchange rates. On the corporate side, the growth is contributed mainly by two factors - one is that the working capital requirements of the companies continue to grow and we are getting a larger and larger market share in the working capital business. Secondly, the disbursements to the existing projects which are under implementation. Q: On the question of the sale of debts, you undertook one in last quarter of KFA. Do you foresee any such cases coming up in this quarter or is there a pipeline for such debts? Also, what led you to sell the KFA asset which was profitable for the bank in any case? A: This is re not planned out on a very long-term basis. I think they happen whenever the right opportunity comes. Of course they can be sold only when you have a very strong security backing that loan. If any such opportunity arises in the future we would do it again. But as of now there is nothing in the pipeline of that kind.