ICICI Bank’s stellar Q3FY22 result wasn’t really a surprise for some as the bank was humming along, beating analysts’ estimates. The bank’s focus on maintaining robust asset quality and other operating metrics is evident with its performance and sturdy growth numbers so far in FY22. The bank’s total loan advances increased by 16% YoY to Rs 8.13 lakh crore and net NPA ratio reduced to 0.85% (14 bps fall QoQ).

ICICI Bank’s net profit rose 25% YoY to Rs 6,194 crore (consolidated net profit rose 19% YoY to Rs 6,536 crore). This was aided by strong growth in net interest income (NII), an increase in fee income, and a decline in provisions. Third-quarter saw growth in various sectors aided by festive season and rise in demand in goods and services. Personal loans, credit cards, and mortgage loans grew in double digits in Q3FY22.

Provisioning sees a substantial fall of 27% YoY to Rs 2,007 crore in Q3FY22. This fall is one of the major contributors to improving PAT for the bank this quarter. The management believes that once the third wave of Covid subsides and the business grows in Q4FY22, provisions are likely to come down further.

Retail loans continue to dominate the business mix

Retail loans now make up 61% of ICICI Bank’s total loan mix. This led to a 17% rise in ICICI Bank’s total assets under management to Rs 8.2 lakh crore. This was helped by a surge in consumer spending in Q3FY22 because of the festive and marriage season. Retail loans are generally provided to an individual by a bank to purchase assets like vehicles, personal loans and credit card spends. This segment added Rs 78,637 crore to the total retail loan mix since Q3FY21 taking the retail loan AUM to Rs 5.02 lakh crore at the end of Q3FY22.

In retail loans, mortgage loans AUM grew 23% YoY growth to Rs 2.78 lakh crore. The management says there is scope in the growth of mortgage loans as their lending rates are at par with the market, giving them a competitive edge. Also, once the third wave subsides there is a chance of improved customer sentiment as spending is likely to increase causing retail loans to grow further in FY23.

While vehicle and auto loans increased by 5% and 12% YoY, their contribution to the loan mix decreased. This was because of higher demand for personal loans and credit cards in Q3FY22. In Q3FY21 vehicle and auto loans constituted 12.8% and 7.1% of the total retail mix. This is now reduced to 11.6% and 6.8% respectively in Q3FY22. The commercial vehicle and equipment segment saw a fall in AUM by 3% YoY to Rs 25,671 crore from Rs 26,407 crore in Q3FY21. As auto retail sales pick up the pace, these segments might see decent growth in FY23.

Coming to the credit card segment, the management says that partnering with Amazon and increased customer spends are the reasons for segment growth. The credit cards segment saw the highest AUM growth of 32% YoY to Rs 22,800 crore. ICICI Bank also leveraged its credit card segment well during the time HDFC Bank, the one with the highest market share in credit cards, was banned by RBI from issuing of new credit cards. During this time, customer sentiment towards ICICI Bank’s branding improved causing a surge in demand for this segment in Q3FY22.

Business banking and SME loans grew the highest in YoY terms by 39% and 34% respectively. This is because of better lending quality as the bank’s lending policies are now directed towards corporates with good ratings and strong balance sheets. The contribution of business banking is rising since Q1FY22 from 5% to 6% in Q3FY22. 

Overseas loans declined 6% YoY to Rs 40,677 crore from Rs 43,061 crore. According to the management, non-India-linked corporate finance, meaning, non-Indian companies with Indian or India-linked operations, saw a fall in demand hitting growth of overseas loans.

Reducing NPAs and rising interest income were key to ICICI Bank’s Q3FY22 performance

The non-performing assets (NPAs) of the company are on a continuous decline since the start of FY22 because of lower slippages and higher write-offs. Slippages for Q3FY22 stand at Rs 4,000 crore, a 2.04% YoY fall. Slippages mostly fell across segments like retail loans, corporate and SME loans. Retail loans slippages fell by 2.87% YoY to Rs 3,850 crore and slippages from corporate and SME loans lowered to Rs 1,650 crore. The Gross NPA ratio fell 25 bps YoY and 69 bps QoQ to 4.13%. Currently, the amount of gross NPAs held by the company amounts to Rs 4,018 crore. 

Taking out the provisions, net NPA in Q3FY22 is at 0.85% a slight increase by 22 bps YoY but a decline of 14 bps QoQ. Net NPAs increased because of slow-paced recoveries. Although the management is building processes to improve recoveries, it is yet to reach last year’s numbers. The management expects net NPAs to reduce further once recoveries improve in Q4FY21. Right now recoveries stand at Rs 4,210 crore in Q3FY22.

Net interest income increased 23% YoY to Rs 12,236 crore as interest income rose 12% YoY to Rs 22,082 crore. Interest expenses saw a marginal rise by 0.3% YoY to Rs 9,846 crore causing the net interest income to jump up. Net interest margin (NIM) was 29 bps higher YoY at 3.96% in Q3FY22 as cost of funds fell to 3.6% from 3.97% in Q3FY21.

Another important factor that contributes to the growth in net profit of ICICI Bank is fee income. Fee income grew 19% YoY to Rs 4,291 crore. Fee income from retail, business banking, and SME segments were the highest, contributing 76% to the total fee income. 

Advances, deposits, and operating profits show reasonable growth

Looking at advances and deposits growth, both were up by 16% YoY to Rs 8.13 lakh crore and Rs 10.17 lakh crore respectively. The rise in advances is because of the increasing demand for loans in the domestic market as total domestic advances grew to Rs 6.5 lakh crore (18% YoY growth). CASA ratio improved to 45% in Q3FY22 from 44% in Q2FY22 and 41.8% in Q3FY21 because of increasing deposits.

Operating profit for the bank is steadily rising since Q3FY21 because of an increase in total income. Total income includes interest on advances, interest on balances with RBI, and combined other incomes. The operating profit numbers for the current quarter show a 15% YoY rise to Rs 10,148 crore.

This is a slightly lower number than estimated by analysts. The management says that the rise in operating expenses has subdued their operating profit growth for this quarter but the numbers will revive in Q4FY22. Operating expenses soared in Q3FY22 as the bank onboarded new employees, and provided ESOPs to top management employees. 

Sustainable long-term growth likely for ICICI Bank

The bank’s improving net profit and core operating profit are positive signs. Brokerages like HDFC Securities, Axis Direct, Edelweiss, and Prabhudas Lillladher see the bank’s sharp focus on improvement in asset quality to be the key driver for future growth. RoE (return on equity) was 15% for the bank in Q3FY22, which is well above the estimated number of LKP Securities. Slippages reduced to 2% of total advances in Q3FY22 from 2.92% of total advances in Q2FY22. It implies that the bank’s asset quality is stabilizing.

The management is focused on tapping the business banking and SME markets as it expects demand for loans to improve in these segments. In terms of vehicle financing, the management expects car loan growth to improve, especially in the pre-owned car segment. Even though the risk in this segment is high, RoE and yields are much better than the new car segment. The focus is on improving market share across the retail loan segment through new customer acquisitions.

Overall, the bank’s core operating metrics are on a stabilizing trend with steady growth in FY22. With an increase in expenditure on technology, the bank is likely to add more customers to its database. The bank has taken considerable initiatives to build a favorable loan mix. Axis Securities is positive on the bank’s future growth as slippages decreased and with additional provisioning in place, the bank is ready to withstand any obstacles that come their way. Trendlyne’s Forecaster estimate shows that EPS (earnings per share) is expected to grow by 28.1% in FY22. With all the metrics seeing favorable trends, ICICI Bank has outperformed its peers and is set to take on new business challenges and drive future growth.