ICICI Bank sees another margin squeeze in Q3 as FCNR-B costs kick in
ICICI Bank Ltd, India's second largest private-sector bank, expects its net interest margin (NIM) to dip marginally in the December quarter as the full cost of foreign currency non-resident bank (FCNR-B) deposits raised in the September quarter kicks in, before margins begin to recover.
“The full impact would largely get reflected in the third quarter, after which we expect the margins to start moving up, even based on the current level of policy rates,” executive director Sandeep Batra said at a post-earnings press conference on Saturday.
The private lender's net interest margin (NIM)—the difference between a bank’s earnings on loans and investments and its cost of deposits and borrowings—fell to 4.18% in the September quarter from 4.36% in the June quarter.
Its net interest income still grew 17.7% year-on-year to ₹25,339 crore, and profit before tax rose 20.4% to ₹19,724 crore. Excluding treasury, which posted a ₹230 crore loss as government bond yields rose, profit before tax grew 23.4% to ₹19,954 crore.
Batra attributed about 9-10 basis points (bps) of the margin decline to a change in the bank’s deposit mix after it mobilized about $18 billion in FCNR-B deposits under the Reserve Bank of India’s swap facility. Of this, about $10 billion was leveraged by the bank itself, about $3.6 billion came through partner banks, and about $4.6 billion came from retail depositors who took no leverage. One basis point is one-hundredth of a percentage point.
The inflows lifted total deposits 27.1% on-year, compared with 17% excluding FCNR-B, and pulled the average current and savings account ratio down to 35.8% from 38.1% in the June quarter.
Batra said the bank had done better than it initially expected under a scheme he described as meeting “an overall national need for foreign exchange”.
The landed cost of these deposits, which is the all-in cost to the bank after paying interest to non-resident depositors and covering the expense of hedging the dollar funds against rupee swings, came to about 6.5%. That is slightly higher than the 6.30-6.40% the bank had estimated in their July post-earnings call, when the scheme was just launched.
The deposits run for three to five years and are exempt from reserve and priority-sector lending requirements, allowing the bank to lend the full amount. Part of the money has gone into repaying bulk deposits and funding loans, and the rest will be deployed over the next two quarters.
Total loans grew 30% on-year, or 24.1% excluding loans made by overseas branches against FCNR-B deposits. Domestic corporate loans rose 30.6%, which the management linked to capital expenditure, longer working capital cycles, a shift by companies from bond markets to bank borrowing and firms building liquidity buffers. The credit card book, however, shrank 9.7% on-year. They attributed this mainly to a high base, as festive spending began early last year, along with the bank’s exit from customer segments it found unprofitable. “It is not a credit issue,” Batra said.
The management said the bank’s view is that RBI could raise the repo rate twice more by 25bps each, taking it to about 6%, while the central bank gradually withdraws surplus liquidity from the banking system. Since a large share of ICICI Bank’s loans is linked to the repo rate, loan rates adjust faster than deposit rates in a hiking cycle, a pattern they expect to repeat this time.
The bank said the Insurance Regulatory and Development Authority of India’s (Irdai) consultation paper on distribution economics would have little effect on its earnings. The paper proposes capping commissions on single-premium life cover packaged with loans at 2% and describes such cover as “near mandatory in practice”. That provision directly affects banks and non-banks that sell insurance alongside loans.
Batra said bancassurance fees account for less than 1% of the bank’s total income and about 5% of its fee income, and that it sells insurance only from ICICI group companies. Asked whether its ties with group insurers would change if the paper is adopted as proposed, he said “nothing will change”, adding that the impact on the bank’s profit would be “absolutely minimal”.
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