ICICI Bank Ltd.’s net interest margin, likely under pressure in April-June due to rising interest rates, should remain at around 2.6% this fiscal year, helped in part by improving margins at the international book of India’s largest private sector bank by assets, its chief financial officer said.
“There are indeed headwinds in this [net interest margin] regard. The interest rates on saving bank deposits have been increased to 4% from 3.5% from May 1,” said N.S. Kannan in a recent interview.
Net interest margin, or NIM, is the difference between yields on loans and the cost of funds. The bank reported a NIM of 2.7% last fiscal year ended March 31.
Industry analysts expect NIMs for most Indian lenders to come under pressure in the ongoing first quarter following a series of rate increases by the central bank. While deposit rates are the first to be repriced higher, lending rates move up with a lag, putting pressure on margins.
Despite the near-term pressure, ICICI Bank confidence of stable margins for the current fiscal year is supported by wider spreads between its lending rates and cost of funds on the international book.
“The positive in this context is on the international NIMs, which we expect to increase from 85 basis points [in the last fiscal year] to about 1.2% over the next four to six quarters. As such, this is going to be additive to our NIM,” Kannan said.
Shares of the bank rose on the news of its margins, touching an intraday high of 1,080 rupees ($24.07). The shares closed up 1.2% at 1,078.25 rupees, while the benchmark Sensex finished up 0.9
ICICI Bank was forced to tighten its purse strings in the 2008-2009 fiscal year following the global financial crisis and a sharp spike in its retail unsecured loan portfolio, including credit cards and personal loans. It pulled out of most of the unsecured business and focused instead on providing mortgages and vehicle loans.
The lender has brought down its total exposure to unsecured loans to 3% from the highs of 12%-13%, reduced its net bad loans as a percentage of total assets to below 1% and has created a strategy around increasing its share of low-cost and stable current and saving account, or CASA, deposit base.
“Our focus continues to be on mobilizing CASA and retail deposits,” Mr. Kannan said, adding that the bank expects to maintain CASA deposits as a proportion of total deposits at about 40%, which is up from about 28% two years ago.
On the lending front, the bank expects growth to come from its focus on mortgages and vehicle loans–commercial vehicles and passenger cars–on the retail side.
“On the corporate front, project financing, working capital financing and foreign currency loans to Indian corporates are growing,” Mr. Kannan said, adding that given the interest rate differential, Indian corporates are looking for foreign currency loans and ICICI Bank expects to benefit from that.
He expects overall loan growth for the bank in this fiscal year at 18%-20%–in line with the industry, but slower than predictions at the start of the fiscal year of a 23%-25% industry credit growth. This compares with a loan growth of 19.4% for the last fiscal year.
Retail loan growth this fiscal year is likely to lag at 15%-17%, with the retail portfolio likely between 35%-39% of the total loan book, Mr. Kannan said, adding that the bank is currently adequately funded and doesn’t need to raise further capital in the near future.
The lender, which after more than a year of muted growth resumed its loan book expansion from the January-March quarter, posted a 44% jump in its January-March net profit to 14.52 billion rupees, its highest in many quarters, helped by declining provisions and a healthy loan book.
Mr. Kannan expects the bank to bring down provision costs, or provisions as a percentage of total loans, to around 0.80 percentage point in the current fiscal year, from 1.2% last year. “In the medium term we expect this to be at about 1%.”
He added that he doesn’t see any significant pressure on asset quality due to rising interest rates as the “bulk of the problem was in the retail unsecured portfolio”.
The bank, however, expects stable or lower growth in its international subsidiaries in this fiscal year, Mr. Kannan said.
“These entities [U.K. and Canada subsidiaries] are funded primarily through local retail deposits and generally regulators have guided that such entities should focus increasingly on lending locally. However, as an India-based franchise, our proposition largely comes from India-linked business,” Mr. Kannan said.
The bank has subsidiaries in the U.K., Russia and Canada and operates from branches in the U.S., Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre.
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