Stock Review: ICICI BANK

ICICI Bank ended the quarter to March reporting good numbers — a strong 44% growth year-onyear in net profit along with an improvement in asset quality and a better-than-expected growth in net interest income. This comes after almost six quarters of a consolidation phase. However, slower growth of its overseas subsidiaries including the UK, Canada and Russian units given overseas regulatory fiats on lending foreign funds to Indian firms may pose concerns. At a time, when most banks are struggling to maintain their net interest margins or NIM, ICICI has managed to report an increase of 10 bps to 2.7% in the March quarter. The growth in NIMs — a key measure of profitability has come about due to lower cost of funds and a growing current and savings account CASA ( relatively low cost deposits) in its deposit mix. The CASA ratio of India's large private lender has risen to 45.1% compared to 41.7% in the March quarter 2010. ICICI Bank grew its loan book 19% in the March 2011 quarter which was lower when the compared with the growth of 21% at the indus-try's level. The loan growth was powered by higher lending to corpo-rates (44%). The bank has increased its focus on the retail business, which currently forms 39% of its total loan book, with home loan and vehicle loan as focal points after having chosen not to grow its retail book in the consolidation phase. At the end of quarter to March 2011, home and auto loans constituted 65% and 27%, respectively, of the re-tail loan book.

What is also positive is the continuous improvement on the asset quality front. Net non-performing asset or bad loans form 1.1% of net advances, down from 2.2% a year ago. However, the bad loans are still higher compared to peers such as HDFC Bank and Axis Bank which re-ported only 0.3% net NPAs. The ICICI management has indicated that an improvement in asset quality would still remain top on the bank's agenda.

Amajor concern continues to be the performance of the overseas arms with the growth way below initial expectations. These branches are operating at a high capital adequacy, for instance, the Canada branch, has a capital adequacy ratio of 23%. A challenge for the bank would be to effectively utilise capital in its overseas branches to boost overall consolidated return on equity or ROE. The private lender's show may have lagged consensus analysts estimates but if macro headwinds are favourable, the bank may be well positioned to take advantage in the upcoming quarters as it is well capitalised. The fact that the pace of pile of loans is slowing down should also help. That said, there are bound to be pressures on margins with the RBI poised to further raise rates which could, in turn, impact core business of lending to both corporates and dampen renewed attempts to ramp up its retail portfolio. At the current price to earning ratio of 16, the bank's stock may still be attractive.