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ICICI Bank Limited’s (IBN - Analyst Report) fiscal second quarter 2013 (ended September 30) net profit came in at INR19.56 billion ($370 million). This reflects a surge of 30% from the year-ago profit of INR15.03 billion ($284 million).

Results benefited primarily on the back of augmented top line and a dip in loan loss provisions. Moreover, asset quality continued to show signs of improvement and the capital ratios remained robust. Nevertheless, rising operating expenses was the major dampener.

Performance in Detail

Net interest income improved 35% from INR254.06 billion ($474 million) in the prior-year quarter to INR33.71 billion ($638 million). Similarly, net interest margin jumped 39 basis points (bps) year over year to 3.00%.

Also, non-interest income elevated 17% from INR17.40 billion ($329 million) in the year-ago period to INR20.43 billion ($387 million).

Operating expenses for the quarter totaled INR22.21 billion ($420 million), up 17% year over year. The increase was primarily a result of the bank’s branch network expansion. ICICI Bank has the largest branch network among private sector banks in India. As of September 30, 2012, the bank had 2,772 branches and 10,006 ATMs.

Provisions for the reported quarter surged 59% year over year to INR5.08 billion ($96 million).

Asset Quality

ICICI Bank witnessed improvement in asset quality during the quarter. As of September 30, 2012, net nonperforming assets were INR21.38 billion ($405 million), shrinking 4% from INR22.36 billion ($423 million) in the prior-year quarter. In addition, the bank's net nonperforming asset ratio stood at 0.66%, declining 14 bps from the year-ago period.

Balance Sheet

As of September 30, 2012, ICICI Bank’s total advances were INR2,750.76 billion ($52.0 billion), rising 18% from INR2,339.52 billion ($44.3 billion) as of September 30, 2011. In the quarter under review, ICICI Bank’s savings account deposits augmented15% year over year to INR806.18 billion ($15.3 billion).

Further, as of September 30, 2012, current account deposits totaled INR338.00 billion ($6.4 billion). Moreover, as of September 30, 2012, the current and savings account (CASA) ratio was 40.7%.

Capital Ratios

As per the Reserve Bank of India's guidelines on Basel II norm, ICICI Bank's capital adequacy was 18.28% and Tier-1 capital adequacy was 12.83% as of September 30, 2012. These were well above the minimum requirements of 9.0% and 6.0%, respectively.

Peer Performance

HDFC Bank Ltd. (HDB - Analyst Report) reported its fiscal second quarter 2013 (ended September 30) net profit of INR15.60 billion ($0.29 billion), exhibiting an improvement of 30.1% from the prior-year quarter. Improvements in net interest income and fee revenue were among the positives during the quarter. Moreover, the company reported notable hikes in deposits and loans. However, higher operating expenses were the primary headwind.

Our Take

We anticipate continued synergies from ICICI Bank’s heightened dependence on domestic loans, almost stable funding base, improving asset mix and enhanced pricing power. Nevertheless, we are concerned about its highly competitive operating environment, continuous rise in operating expenses and below-average credit quality.

ICICI Bank currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain the long term ‘Neutral’ recommendation on the stock.

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