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ICICI Bank Ltd.’s (IBN - Analyst Report) first-quarter fiscal 2015 (ended Jun 30) net profit came in at INR26.55 billion ($441 million), up 17% from the year-ago quarter. Despite this year-over-year improvement, the bank’s ADRs fell 1.4% after the announcement on Thursday reflecting concerns among investors about the continued weakening of asset quality.

Results were facilitated by higher net interest income and fee income, partly offset by mounting operating expenses. While capital ratios remained strong and loan and deposit balances increased, the declining asset quality continued to be an unfavorable factor.

Performance in Detail

Net interest income grew 18% from the prior-year quarter to INR44.92 billion ($746 million).

Non-interest income rose 15% year over year to INR28.50 billion ($474 million). The reported quarter included INR1.03 billion ($17 million) of exchange rate gains on repatriation of retained earnings from overseas branches.

Operating expenses totaled INR28.25 billion ($469 million), up 13% year over year. The increase was primarily due to expansion of the bank’s branch network. ICICI Bank has the largest branch network among private sector banks in India. As of Jun 30, 2014, the company had 3,763 branches and 11,447 ATMs.

Asset Quality

ICICI Bank’s credit quality continued to deteriorate. As of Jun 30, 2014, net nonperforming assets were INR34.74 billion ($577 million), up 41% from the prior-year quarter. Further, provisions increased 22% year over year to INR7.26 billion ($121 million).

Balance Sheet and Capital Ratios

As of Jun 30, 2014, ICICI Bank’s total advances amounted to INR3,470.67 billion ($57.7 billion), rising 15% from INR3,013.70 billion ($50.1 billion) as of Jun 30, 2013. The surge was mainly driven by robust growth in the retail segment, with a 26% year-over-year rise in total retail loan portfolio.

ICICI Bank’s savings account deposits climbed 16% year over year to INR1,027.36 billion ($17.1 billion) while current account deposits grew 13% year over year to INR416.78 billion ($6.9 billion). Moreover, the current and savings account (CASA) ratio came in at 43.0% as of Jun 30, 2014.

In compliance with the Reserve Bank of India's guidelines on Basel III norms, ICICI Bank's capital adequacy was 17.0% and Tier-1 capital adequacy was 12.23% as of Jun 30, 2014. These were well above the minimum requirements.

Our Take

We expect ICICI bank to continue with its expansion in India and other overseas locations. Moreover, improved services will lead to an extensive client base, which in turn will enhance the bank’s growth in the future.

However, escalating expenses along with rising provisions continue to keep us cautious. Also, the intensively competitive Indian market and skepticism surrounding the economic environment in India under Modi's government will likely keep the bank under pressure.

At present, ICICI Bank sports a Zacks Rank #4 (Sell).

Other Foreign Banks

Another Indian bank HDFC Bank Ltd. (HDB - Analyst Report) reported first-quarter fiscal 2015 (ended Jun 30) net profit of INR22.33 billion ($0.37 billion), up 21.1% from the prior-year quarter. An increase in net interest income was partly offset by elevated operating expenses and lower non-interest revenues. Also, deposit and loan balances continued to show improvement.

Among other foreign banks, HSBC Holdings plc (HSBC - Analyst Report) and Shinhan Financial Group Company Limited (SHG) are scheduled to report second-quarter 2014 results on Aug 4 and Aug 12, respectively.

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