If treasury income is excluded, the bank had to contend with a mere 6 per cent net profit growth.

It hasn’t been a great start to the current financial year for ICICI Bank. The bank may have posted a decent net profit growth of 25 per cent y-o-y in the June quarter to Rs 775 crore, but it’s owing to robust treasury operations as capital gains increased 122 per cent.

If one looks at the profit before tax less treasury income, the number at Rs 777 crore is an increase of just 6 per cent.

While the increase in advances was a smart 35 per cent y-o-y, driven by increased corporate credit both at home and overseas, the pace of retail loan growth has slowed down to 29 per cent y-o-y.

However, core banking operations didn’t yield much and the rise in the net interest income (NII) has been a subdued 16.2 per cent y-o-y to Rs 1,714 crore.

The growth in the NII has moderated despite the bank concentrating more on higher-yielding non-collateralised assets which couldn’t offset the higher cost of bulk deposits during the quarter and a lower share of current and savings accounts (CASA).

Funding costs have risen sharply in the last two quarters to about 7.8 per cent in the first quarter of FY08 though this should come off in a more stable interest rate environment. The net interest margin (NIM) came down by about 37 basis points to 2.3 per cent from 2.67 per cent in the fourth quarter of FY07.

The growth in fee income at 35.4 per cent y-o-y to Rs 1,428 crore has been good with retail fees contributing the maximum. What is most disappointing is the deterioration in the asset quality with gross NPLs up 25 per cent sequentially while net NPLs for the first quarter of FY08 were up 300 basis points sequentially to 1.3 per cent.

At the current price of Rs 985, the stock trades at about 1.4 times FY09 adjusted book value (adjusted for both NPLs and subsidiaries) and is attractively valued given that the worst may be over in terms of cost pressures.