ICICI Bank’s net profit jumped 20.1% year-on-year to Rs 14,843 crore in the three-months ended September as loan growth soared and provisions for bad loans remained lower.

The quarter was aided by an inflow of $18 billion in FCNR(B) deposits under the Reserve Bank of India’s forex swap window, which boosted the fund base but narrowed the private lender’s net interest margins (NIM).

It was an outstanding loan growth quarter, rising 30% YoY to Rs 18.32 lakh crore. Even without foreign currency non-resident (Bank), or FCNR(B), deposits, credit growth was strong. “Excluding loans provided by international branches of the bank against FCNR(B) deposits, total loans grew by 24.1% year-on-year and 7.3% sequentially,” said ICICI Bank group chief financial officer Anindya Banerjee.

The full impact of the swelling in foreign currency non-resident (Bank), or FCNR(B), deposits on the bank’s balance sheet would be felt in the fiscal third quarter. 

“We will see a further moderation in margins, offset a little bit by the rate hike, which has already taken place. But then from Q4, I would expect margins to come back in a pretty healthy way as these factors start to reverse out, even assuming that there are no further rate hikes,” Banerjee told analysts.

During the second quarter, the bank’s NIM declined to 4.18% from 4.36% in the previous three months and 4.30% a year earlier.

The decline in margins for a quarter or two doesn’t concern the bank. “We believe that we have raised a very large quantum of fixed rate funding (FCNR deposits), which will support our growth and the expansion of our franchise over a period of time. And also given the fact that interest rates are certainly unlikely to go down and probably likely to go up, that gives a cushion to the profitability as well. So from a timing balance sheet construct and just pure franchise perspective, we saw this as a big opportunity. And the small movement in margins, which anyway continue to be pretty healthy at the absolute level, while there is a shift from quarter-to-quarter, was not really something that concerned us too much,” Banerjee explained.

The bank’s net interest income (NII) rose 17.7% YoY to Rs 25,339 crore, which in turn pushed up profitability.

Provisions also fell by 32.5% quarter-on-quarter to Rs 851 crore.

The bank’s loan book saw growth across all the segments, led by corporate and business segments along with international operations which was helped by the huge mobilisation of FCNR(B) deposits. 

Domestic corporate loans rose 30.6% YoY, while business banking grew 33.8% and retail and rural book by 14.8%. Within retail, the mortgage portfolio grew by 15.3%, vehicle loans by 7.8% and personal loans by 16.6%. 

The influx of FCNR(B) deposits has led to excess liquidity while enabling the bank to fund credit expansion and also shed its costlier bulk domestic deposits. 

“I would expect the FCNR deposits to be kind of deployed over the next two quarters, which is anyway the season where traditionally credit growth tends to be strong,” said Banerjee.

On the deposit front, the bank reported a growth of 27.1% YoY to Rs 20.50 lakh crore at the end of the September quarter. Excluding FCNR(B) deposits, total period-end deposits grew by 17% YoY.

The CASA (current account savings account) share in the total deposit mix stood at 36.1%. 

The rise in cost of deposits to 4.50% in Q2, compared with 4.41% in the previous quarter and 4.64% in Q2 of last year, led to a compression in NIMs.

“The increase in proportion of the assets of overseas branches in the total assets and the large sequential increase in the retail term deposit base have led to a moderation in margins and the full impact would reflect in the third quarter, after which we expect the margins to start moving back up even based on the current level of policy rates,” said Banerjee.

Interest rates on about 57% of the bank’s total domestic loans are linked to the repo rate and other external benchmarks. While 14% of the loans are linked to MCLR and other older benchmarks, the remaining 29% of loans have fixed interest rates. 

The bank’s gross non-performing asset (NPA) ratio stood at 1.20% as on 30 September, compared with 1.38% in the previous quarter.

The net NPA ratio was 0.30% at end-September quarter, compared with 0.35% in the previous three months and 0.39% a year ago.

During the quarter, the bank added gross non-performing assets (NPAs) of Rs 4,833 crore compared to Rs 5,034 crore in Q2 of last year. 

The gross NPA additions from the retail and rural portfolio were Rs 3,709 crore, down from Rs 4,049 crore a year ago. In the corporate and business banking portfolios, this stood at Rs 1,124 crore, up from Rs 985 crore.

Recoveries and upgrades from gross NPAs, excluding write-offs and sale, were Rs 3,620 crore compared to Rs 3,648 crore in Q2 of last year. 

The bank said recoveries and upgrades from the retail and rural portfolio were Rs 2,604 crore from Rs 2,610 crore a year ago. In the corporate and business banking portfolios, this stood at Rs 1,016 crore, down from Rs 1,038 crore. 

The gross NPAs written off during the quarter were Rs 1,592 crore. There was sale of NPAs of Rs 133 crore for cash in Q2.

The net additions to gross NPAs were Rs 1,213 crore in the September quarter, down from Rs 1,386 crore in Q2 of last year.

The net additions to gross NPAs in the retail and rural portfolio were Rs 1,105 crore compared to Rs 1,439 crore a year ago.

The lender’s provisioning coverage ratio on non-performing loans stood at 75% as of 30 September compared with 74.7% in the preceding quarter.