ICICI Bank

While ICICI Bank’s moves to improve its financials are working, it will take 2-3 quarters before the benefits will be felt
Even as the June 2009 quarter performance of ICICI Bank was among its worst in terms of operational numbers, the bank’s medium-term strategy of focusing on the four ‘Cs’ seems to be working. This strategy centers around capital conservation, CASA improvement, cost control and credit monitoring. However, it may take two-three quarters before the benefits of these changes could be fully felt. While the performance of its life insurance subsidiary has also been muted, the pace is expected to pick up in the remaining part of the year. And, if economic growth picks up as anticipated by the second half of the current fiscal, it should help clear the clouds surrounding the bank’s medium-term growth prospects and asset quality.

Core income down Consequent to the economic slump that hit the world including India in 2008, ICICI Bank consciously decided to cut its exposure to unsecured retail segments like credit cards and personal loans. Not surprisingly, the share of its retail loans to total loans has been on a decline for some time now and stood at 48.5 per cent for June 2009 quarter. This is also partly responsible for the reduction in the bank’s total domestic loans and hence, has also meant lower deposit growth. For the quarter ended June 2009, the bank’s net interest income (interest income minus expended) was down five per cent on a year-on-year (y-o-y) basis. The decline in its loan portfolio, slowdown in business activity and lower volumes in retail savings and investment products led to a 32.6 per cent decline in the bank’s fee income to Rs 1,319 crore for the June quarter.

Over the last few quarters, ICICI Bank’s profits have received some support from gains on the treasury front. For June 2009 quarter, treasury gains stood at Rs 714 crore as against a loss of Rs 594 crore in June 2008 quarter, thus operating profit was up 47.5 per cent y-o-y at Rs 2,529 crore; adjusting for treasury gains, profit was lower by 21 per cent.

Problem loans still high While the bank fights hard to clear the legacies of the economic slump, its non-performing assets (NPAs) have also been high. Nonetheless, the bank has been aggressive in making provisions; total provisions were up 31 per cent at Rs 3,808 crore in 2008-09 and up 67 per cent at Rs 1,324 crore in June 2009 quarter. To a large extent, the RBI’s policy allowing banks to not classify restructured assets (providing relief till December 2009) as NPA has helped banks contain any sharp rise in NPA levels. For ICICI Bank, the combined figure for net NPA and restructured loans work out to 4.14 per cent (including 1.95 per cent for restructured loans) as compared to the 1.74 per cent net NPA reported for June 2008 quarter. Notably, even as the bank upgraded Rs 3,200 crore worth of loans as standard assets (as repayment track-record improved) during June quarter, it expects to restructure some more corporate assets (Rs 1,500-2,000 crore estimate analysts) during the next two quarters, both in its domestic and overseas books. However, it believes that the corporateside NPA levels will not rise. Analysts believe that the bank’s absolute provisioning figures should decline from the third quarter of 2009-10, as the share of unsecured retail loans to total loans shrinks further from 7-8 per cent currently – this category accounts for about 66 per cent of the bank’s NPAs.

Margins to rise As its deposit base has declined over the last few quarters, the bank has allowed the high-cost deposits to contract while maintaining the low-cost current and savings account (CASA) deposits base. Thus, the share of CASA in total domestic deposits has risen to 30.4 per cent in June 2009 quarter from 26.1 per cent in March 2008 quarter, which in turn has partly helped improve its net interest margins (NIMs) on a y-o-y basis. Although the margins were lower on a sequential basis, it is largely due to the low yield priority (agri) sector loans that the bank undertakes in the March quarter every year, wherein the impact on margins is felt in the June quarter.

ICICI Bank has licenses to open 580 new branches, which it aims to do so by the end of March 2010. This should help improve the bank’s CASA ratio, which the bank aims to take it closer to 33 per cent levels by March. Also, 50-55 per cent of its total borrowings are wholesale in nature, part of which was raised at high rates of 11-12 per cent during September-November 2008 for a period of 12 months. As they come up for renewal, the bank hopes to refinance these at lower levels; analysts expect a reduction of about 300-400 basis points (bps) in interest costs for such borrowings. Overall, even as the share of high-yielding retail loans declines (or stays flat), the bank’s NIMs should expand driven by increase in CASA deposits and re-pricing of wholesale deposits says a bank’s spokesperson.

The other aspect is the bank’s success in containing costs. For 2008-09, operating expenses were down by 14 per cent – for June 2009 quarter these have declined by 19.2 per cent to Rs 1,546 crore – mainly due to focus on cutting employee costs, direct marketing expenses and collection charges. Going ahead, even as it aims to expand its branch network, the bank hopes to curtail the absolute operating expenses at 2008-09 levels, which should help keep its cost-to-income ratio low.

Outlook While the tough times don’t appear to be over yet, the worst seems behind. With focus shifting away from non-secured loans, the bank’s asset portfolio quality should hopefully improve.

Given the expectations of an upward bias in interest rates, analysts don’t expect the trend in high treasury gains to continue in the ensuing 2-3 quarters. Assuming an economic recovery as well as pick-up in credit growth from the second half of 2009-10, the bank is seen clocking a topline growth of about 5 per cent led by enhanced focus on project and corporate financing and home loans. This, along with an increase in NIMs and lower costs, the bank’s core profit growth (excluding treasury gains) should be relatively better. Among its key subsidiaries, the turnaround of ICICI Prudential Life Insurance Company is expected in 2010-11; any move to list this subsidiary should unlock value. Analysts value the worth of all subsidiaries (AMC, securities trading, general and life insurance) at Rs 180 per share of ICICI Bank. At Rs 759, the stock is trading a price-to adjusted-book value (only for the core business) of 1.4 times and leaves room for 15-20 per cent gains over 12 months. Investors may consider on dips.