Amid a shortage of deposits, an emerging pain point for the banking sector is the stress in retail and rural segments. Slowdown in FMCG sales and recent earnings of some banks mirror this concern. In this background, private sector lender ICICI Bank’s standalone September quarter (Q2FY25) result is commendable. The bank has managed the stress in retail and rural portfolio well through aggressive write-off.
Net addition (after recoveries and upgrades) to gross NPA of ₹1,754 crore during Q2FY25 came entirely from retail and rural portfolio. The bank has written off NPAs worth ₹3,336 crore as against ₹1,753 crore in Q1FY25. Higher credit costs pulled down the growth in core profit before tax to 9% year-on-year even though core pre-provision operating profit (PPOP) rose 13% year-on-year (y-o-y) to ₹15,502 crore. Here, core profit refers to profit excluding dividends from subsidiaries, associates etc. and treasury MTM.
Despite healthy year-on-year growth in net advances of 16%, the net interest income rose only 9.5% reflecting the pressure on net interest margin (NIM). Yield on interest earning assets remained steady at 8.63% y-o-y, but cost of funds increased 31 basis points (bps) to 5.09% mainly because of higher cost of deposits. NIM shrunk by 26 bps y-o-y to 4.27%. The sequential decline in NIM was smaller at 9bps, which shows that NIM has stabilized till there is a turn in the interest rate cycle, according to the bank’s management. Fee income rose by 13% to ₹5,894 crore.
Operating expenses rose 7% as the bank has managed to rationalize some of its costs. One prime example being the reduction in number of ATMs and CRMs from 17,102 to 16,120 sequentially. Consequently, cost to income ratio improved significantly from 40.9% to 38.6%. Even sequentially, the ratio improved by 110 bps.
The bank’s return on assets (RoA) came in at 2.4% in Q2FY25, much higher than 1.9% recorded by HDFC Bank, its bigger rival. Even if credit-deposit ratio, which shows liquidity position, is compared, ICICI Bank has fared better at 84% in Q2FY25 versus 101% of HDFC Bank as it stays inflated after the merger with the parent. At a time when most banks are feeling the deposit crunch, ICICI Bank has done well with its average deposits growing by 16% y-o-y with the share of low-cost current account and savings account (Casa) deposits remaining steady at nearly 41%.
The bank’s retail loan book growth details show that the secured loans like vehicle loans grew by 8% whereas the personal loans and credit card loans, relatively riskier as they are unsecured, surged by 20%. While the overall share of the unsecured loans remains moderate at almost one fourth of total retail loans and 14% of total advances, the portfolio needs to be monitored closely for any further signs of stress.
The bank remains well capitalized with a common equity tier-I ratio of 16%, which means that it does not have any pressure to raise capital for growth at least in the near future.
Meanwhile, in the last one year, ICICI Bank stock has outperformed all the leading private sector banking stocks by gaining 37%. Yet, its valuation does not appear frothy. Adjusted for the value of subsidiaries at about ₹200-250 per share as per the estimates of various brokerage houses, the stock trades at P/ABV of about 2.25x based on Motilal Oswal Financial Services’ estimate for FY26. This is a nearly 10% premium to that of HDFC Bank, which seems justified given almost 20% higher RoA.
