ET Intelligence Group: After a strong rally of about 43% since February, the shares of ICICI Bank BSE 0.24 % recently gave up some of these gains ahead of its June quarter results.

Though net profit for the June 2016 quarter managed to beat Street expectations, the stock may continue to remain under pressure as the weak operating performance and elevated slippages may affect net interest margin for the current fiscal.

In the June quarter, net profit fell by 25% year-on-year

to Rs2,232 crore. This was lower than the 30-40% drop predicted by analysts as strong treasury gains and lower tax outgo reduced the impact of a lacklustre 0.8% growth in net interest income — the difference between interest earned on disbursed loans and interest paid on funds raised.

Bad loans are expected to loom large on the bank’s near-term performance. This became evident after the bank disclosed a list of stressed loans worth Rs44,065 crore below investment grade, last quarter. Loans worth Rs8,249 crore turned bad during the quarter and more than half of this came from the disclosed below investment grade bucket.

The below investment grade bucket will put pressure on the future asset quality. The gross bad loans stood at Rs27,193 crore or 5.87% of gross advances at the end of June quarter. It has recognized a substantial portion of loans to mining, metals and steel sectors from this bucket as bad loans and the combined exposure has came down by 25% sequentially during the June quarter.

The management indicated that 30% of fresh slippages in the June quarter may be upgraded to standard account by the year-end. However, pressure on net interest margin (NIM) may continue as the bank will not be able to accrue interest income on additional non performing assets (NPA).

The NIMs in the June quarter declined to 3.16% from 3.54% in the year-ago quarter and 3.37% in the previous quarter. At a time when corporate credit is not picking up, ICICI bank like its peers, has increased focus on retail banking where loan growth has been more than 20% in the last few quarters. While this may support NIMs, its expansion will be limited by the slowing fee income growth as corporate lending concentrates towards companies with higher credit rating.

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