India's ICICI Bank reported net profit growth of 20 percent Tuesday, as it shed non-performing loans and boosted interest income.
Analysts and policy makers have been watching the asset quality of Indian banks, on worries that high interest rates, policy bottlenecks and slowing economic growth are hampering the ability of borrowers to repay loans and slowing credit growth.
While ICICI Bank _ like other Indian banks _ surprised investors with better than expected data on bad loan exposure during the December quarter, analysts cautioned that things could get worse going forward.
"It's too early to extrapolate this benign trend of loan loss provisions into the next several quarters," said Vijay Sarathi, banking analyst at Nomura India.
India's power sector has been especially hard hit, with delays in building out transmission networks and constraints in access to affordable coal.
The central bank has raised rates 13 times in a row in an effort to beat down inflation. High interest rates are now imperiling loan repayment, especially among small- and medium-sized companies.
Sarathi expects loan loss provisions as a percentage of average assets at Indian banks to rise over the next year, from 70 basis points to 100 to 120 basis points.
Chief executive Chanda Kochhar emphasized that ICICI's lending to India's most troubled sectors is limited.
She said the power sector accounts for 7 percent of ICICI's outstanding loans. The bank, she added, has minimal exposure to small- and medium-sized companies. Cash flows from residential housing loans have been stable, and the bank has not seen any "pain" on account of its commercial real estate loans, she said. Direct exposure to India's aviation sector is not very large, she said.
ICICI earned 17.3 billion rupees ($325 million) in the December quarter, up from 14.4 billion rupees during the year ago quarter.
Net non-performing assets fell 28 percent from a year ago, to 20.8 billion rupees ($392 million). Provisions for bad loans totaled 3.4 billion rupees ($64 million), down 27 percent from a year ago. Net interest income increased 17 percent, to 27.1 billion rupees ($511 million), from a year ago.
Corporate demand drove loan growth up 19 percent from a year ago, Kochhar said.
"Corporate, we have already seen the growth, retail the growth is just about starting," she said.
Domestic lending to Indian companies grew 23 percent, while international loans _ mainly from Indian companies seeking to raise foreign currency loans _ grew 18 percent in constant currency terms. Retail loans grew 8 percent, Kochhar said.
"Even on asset quality, they continued their good performance despite this being a tricky quarter from the macroeconomic environment point of view," said Vaibhav Agrawal, vice president of research for Angel Broking.
He said India's private sector banks have been very conservative on issuing loans over the last six or seven quarters, making their asset quality better than their publicly owned peers, which dominate lending in India.
"Recognizing the difficult environment, they've gone very conservative on lending. That's paying off now," he said.
The stock rose nearly 6 percent on the news in Mumbai trading.