Stock Review: ICICI Bank

ICICI Bank, India's largest private sector bank, has been quietly consolidating its books for the last two years. During the slowdown and after, the bank has taken care to fix all problems that came with rapid growth. For one, the bank has shrunk its balance sheet by 20 per cent from 225,600 crore in FY08 to 179,300 crore in FY10. If analysts are to be believed, the period of consolidation is over and the bank has been successful in its 4C strategy — current account, savings account (CASA) growth, cost optimisation, credit quality and capital conservation. Most analysts expect the bank to surprise the Street positively with a net profit of 1,480 crore at the end of the fourth quarter.

In two years, the bank has also changed its strategy. The share of retail loans has shrunk from 55 per cent in FY08 to 45 per cent this year. During the peak years, retail accounted for almost 70 per cent of the bank's loan book, but a sharp rise in non-performing assets or bad loans forced a change.

The bank is now consciously increasing its wholesale lending business, which may impact yields, but is sure to improve credit quality.

Pulling back from risky businesses like personal loans and credit cards has helped the company's bottom line. Net NPAs declined to 1.16 per cent in the third quarter of FY11 from 2.19 per cent in the corresponding period of FY10 and 1.37 per cent in the second quarter of FY11.

Slippages (reduction in NPAs) have steadily been showing improvement over the last few quarters. In the first quarter of FY10 slippage stood at `1,300 crore, which came down to `1,100 crore in the second quarter of FY10, `750 crore in the third quarter and `700 crore in the fourth quarter. By first quarter of FY11, slippages accounted for only `350 crore. At this stage the bank has started building its loan book again. At the end of first nine months of FY11, advances grew to 206,700 crore. Apart from cleaning up its books, the bank has also been leveraging on three major levers of growth — net interest income (NII), other income and operating expenses. While the bank's NII has stayed stagnant for the last few quarters, the company has seen dramatic reduction in its operating expenses. This has been achieved through scaling back payouts to direct selling agents. The bank now conducts its business through its branches. Earlier, payouts to DSAs accounted for `400 crore, which is now down to `35-40 crore.

With easing credit costs, expanding CASA and curtailed operating expenses, return on assets has improved to 1.46 per cent in the third quarter of FY11 from 1.27 per cent and 1.31 per cent in the corresponding period of FY10 and first quarter of FY11, respectively, says a report by Kotak Securities. "The management has guided that return profile would improve further with RoA and RoE rising to 1.7 per cent and 15.0 per cent, respectively, by FY13."