ICICI Bank has reported a decline in its quarterly net profit for the first time since its merger with ICICI [Get Quote].

In a telephonic interview with Business Standard, the bank's Joint Managing Director and CFO Chanda Kochhar terms the quarter as the toughest that she has seen, and talks about the challenges ahead and the strategy to deal with them. Excerpts:

Was the profit fall unexpected?

The analysts' estimate was Rs 695 crore. The market challenges and the environment had all been built in. But if you look at the core operating profit, it has increased 74 per cent. The income from interest and fee is higher. There were a lot of challenges and despite factoring in the Rs 594-crore impact (on investment and treasury), we have reported a net profit of Rs 728 crore.

So, is it the toughest quarter that you have seen?

I would agree with that. But it has to do with the environment. The bond yields increased, the Sensex dropped 24 per cent from its peak.

What about the next quarters?

The challenging environment will last for some more time. But one would hope that the kind of challenges that we faced in terms of rising yields and market movement, are not there (in the coming quarters).

You have reported a 5 per cent rise in the retail loan portfolio, much below the expectation of 10-12 per cent growth.

We have not lost the market share. The total retail portfolio is growing at the same pace as that of the market. We are not consciously scaling down the growth rate, but it is a conscious strategy to grow at the market rate. We will grow by 5-10 per cent. But if you include loans from subsidiaries, the growth then is 20 per cent.

Your provisioning has gone up by over 40 per cent. Is it because of retail loans?

It is in line with the provisioning during the fourth quarter (of 2008). It is the result of a maturing portfolio. We have not seen significant shifts in delinquency levels.

With interest rates rising, the rate of growth has slowed down but people with existing loans are paying (their dues). Maybe, there is a little delay here and there.

Are you facing defaults on corporate loans?

Corporate repayments are moving according to schedule. The profitability of the corporate sector is very healthy, hence there is no impact there.

What about the investment pipeline of $700 billion? Are people deferring investments?

For the system as a whole, the growth rate this year should be 20-25 per cent, and we may grow faster than that. The investment pipeline continues to be strong. We have not seen any pullouts so far. But in the last three or four months, people have not added to the investment pipeline, which is sufficient for a healthy growth rate.

The growth was only 1.6 per cent in the first quarter. What about deposits?

The growth is in line with our requirements. Following our follow-on public issue in July last year, we have been quite comfortable on liquidity. Besides, when there is so much interest rate volatility, we do not want to depend on wholesale deposits.

The CASA (current account and savings account) base has been a healthy 25 per cent, while the base of the savings accounts has increased 35 per cent. The focus is on CASA. That is why the net interest margin is 2.4 per cent compared with 1.95 per cent at the end of the first quarter of FY08.

Why this increase in savings accounts base?

We have increased our market share as we put in extra effort on it. Moreover, we have increased the number of branches. We are consciously opening accounts for younger people.

What are your expectations from the credit policy? Should we expect more rate hikes from you?

It is difficult to predict, given the challenges of managing growth, liquidity and inflation... We are very comfortable on liquidity. We have a cash balance of around Rs 10,000 crore. That is why the increase in interest rates has not impacted us.

There have been talks of overseas acquisition. Is there any movement on that front?

We are looking at opportunities. Given the current situation, there are lots of banks eligible for acquisition. But nothing has been finalised.

Your overseas business accounts for 30 per cent of the revenue. Where do you see it going?

We are not setting any target. Currently, there are lots of opportunities, and since we are very well placed to take care of those opportunities, our business will grow faster.

What about listing your insurance subsidiaries or ICICI Securities?

We have sufficient capital to take care of our subsidiaries. We were planning to list ICICI Securities to set a price benchmark. But the current market conditions are not appropriate for that.

Is it also because of the RBI decision to remove the sub-limit investment in overseas arm?

It has freed up capital and because of that there is more possibility of infusing capital in other subsidiaries.