ICICI Bank Ltd is expected to deliver a robust set of operating metrics for the December quarter, powered by a strong loan growth, core interest income expansion and reduction in stressed loans.
The private sector lender is expected to report a net profit of Rs. 7,994 crore for the quarter, up 29 percent from a year ago period, the average estimate of seven securities firms showed. Net interest income (NII) is expected to have grown 28 percent Year-on-Year (YoY) to Rs 15,639 crore for the three months ended December.
The bank will detail its quarterly earnings on January 21.
The healthy growth in NII is expected on the back of double-digit loan growth and an expansion in the net interest margin. Coupled with traction in non-interest r income, the bank is expected to report an operating profit of Rs 12,193 crore, a YoY increase of 20 percent.
ICICI Bank’s loan book has expanded around 20 percent consistently for several quarters now and analysts expect the bank to have repeated this performance in the December quarter as well. “Loan growth to be solid at 20%, led by healthy contribution from all segments,” wrote analysts at Kotak Institutional Equities in a note. In the September quarter, the lender had reported 23 percent growth in its corporate loans and 25 percent expansion in retail loans.
In an interaction with analysts earlier this month, the bank’s management laid out its plans for faster business growth and reduction in costs by relying heavily on technology and digitization. The bank has multiple times pushed its digital heft through a super app that provides prospective and existing customers with a full stack of products of the ICICI Group as well as other financial companies.
Some of these efforts may reflect in the credit growth number of the bank for the third quarter as well. Further, ICICI Bank’s management also indicated its focus on loans to Small and Medium Enterprises (SMEs) during public interactions in the previous quarters.
“As highlighted in our recent notes, we see strong opportunity for ICICI Bank in SME space where it has customised offerings for micro-segments and offered many firsts to clients,” analysts at Jefferies India Pvt Ltd wrote in a note. SME loans form 4.4 percent of the bank’s total book. Retail and SME loans fetch more bang for the buck as they carry wider spreads compared with loans to large companies.
Margin heft
Banks hiked deposit rates sharply during the December quarter and ICICI Bank was not an outlier. Ergo, the lender is likely to have witnessed an increase in its cost of funds. The bank’s margins have expanded for three straight quarters now and may show a marginal increase in the December quarter as well despite headwinds from deposit rate hikes.
“Margins would continue to expand however at a slower rate, as CoF goes up,” analysts at Prabhudas Lilladher wrote in their note. CoF is short for cost of funds. The lender had hiked its deposit rates thrice during the quarter by 50-100 basis points across tenures. One basis point is one-hundredth of a percentage point.
Analysts believe that the mix of its loan book and a slower repricing of its deposits limit the impact on margins unlike some of its smaller peers. The share of low-cost current and savings accounts for ICICI Bank is high, at 45 percent as of the September quarter. As stated earlier, the bank’s loan mix has tilted towards retail and small businesses that are conducive to margins. Further, within retail, the bank has grown its unsecured personal loan book faster than the other categories, which supports margins.
Stress out of sight
Analysts expect the bank to report a reduction in fresh slippages for the quarter, thereby bringing down its provisioning needs. The gross bad loan pile is expected to decrease on an aggregate level as well. In the September quarter, the bank had reported a gross bad loan ratio of 3.19 percent, a sharp fall from 4.82 percent a year ago.
“We expect provisions to remain at low levels, given lower slippages and better trends on recovery/upgradation. We are building in slippages of 2% (Rs.50 billion), but we see a solid commentary on recovery to continue resulting in lower stress coming from asset quality perspective,” the Kotak note said.
Shares of the lender have outperformed the broad market for more than a year now and much of the positives are baked into valuations, according to analysts. Investors must watch for the management’s commentary on deposit accretion and the pressure on margins in the coming quarters.
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