While there has been an improvement in the core business for ICICI Bank and SBI, concerns over higher provisioning coverage haven’t faded

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The broader indices were in the correction mode in the recent past, but the new RBI provisioning stipulations ensured that banking stocks suffered more. The BSE Sensex lost around 5 per cent in the last fortnight whereas the losses for BSE Bankex were nearly double that figure. In between, the country’s largest public and private sector banks, SBI and ICICI Bank, respectively delivered results that mirrored better profitability, which to an extent was aided by robust treasury gains. Even though the credit-off take was subdued during September 2009 quarter, core performance was better as the margins improved.

Better control on operating expenses shored up ICICI’s profits, which however was not the case with SBI as wage hikes and pension provisions increased the operating expenses. SBI, however, saw its treasury profits jump three-fold on year-on-year (y-o-y) basis. Nevertheless, the deterioration in asset quality showed signs of bottoming out (NPAs were almost stagnant as compared to June 2009 quarter), which along with improved provision coverage requirements could ensure healthier asset book in the long run, even as the short-term profitability would be affected.

Loan off-take subdued, margins up
Amid the economic downturn banks have been selective in lending, while demand too has waned. For ICICI Bank that has been cautious in expanding its loan book, it was even more circumspect on high-yielding unsecured retail loans. ICICI’s overall loan book decreased 15 per cent y-o-y to Rs 1.9 lakh crore at the end of September 2009; in comparison, its retail loan book dropped more (30 per cent) in the same period. On the other hand, the loan yields as well as cost of funds have also come off in the last four quarters, which has helped banks sustain margins.

The decrease in the overall cost of funds is more prominent in the last two quarters. As high-cost term deposits garnered during the second half of 2009, are getting re-priced, it has helped in bringing down the overall cost of deposits. ICICI Bank’s net interest margins (NIMs) were thus, up by 10 basis points (bps) during the quarter to 2.5 per cent.

Bulk deposit rates for SBI declined 24 bps to 6.06 per cent in the last six months. Besides, SBI shed around Rs 50,000 crore of high-cost bulk deposits in the last six months—the ratio of high-cost bulk deposits to total deposits has come-off from 11 per cent in March 2009 to 3.6 per cent now. Besides, Rs 1.5 lakh crore term deposits were also re-priced at rates that were lower by 200 bps. Thus, SBIs margins improved from 2.3 per cent at June 2009 quarter end to 2.6 per cent now. But, since SBI has been aggressive in lending in the recent quarter (at relatively lower rates) its margins are lower on a y-o-y basis.

Going ahead, SBI’s management expects the margins to improve by 10-15 bps in the next few quarters as the bank would benefit from re-pricing of wholesale deposits and an expanding low-cost deposit base.

The share of low-cost CASA deposits (to total deposits) stood at 41 per cent during the quarter, which the management expects to increase to 42 per cent, going ahead. ICICI Bank had observed a spurt in its CASA ratio in the September quarter from 30 per cent to 37 per cent, and this had already been impacting margins positively. Going ahead, expect NIMs of ICICI Bank too to inch up.

Asset quality issues
The after-effects of the economic slowdown have caught up with most banks in the form of growing non-performing assets (NPAs). SBI and ICICI Bank are no different. For the September 2009 quarter, SBI’s NPAs inched up on account of loan delinquencies in the retail and international book (USA accounts for a quarter of NPAs).

Overall, gross NPAs surged 38 per cent year-on-year in September 2009. But, since it did not provide enough for the NPAs, its provision coverage declined 450 bps to 42.9 per cent, which is not comforting. Given the RBI’s new provisioning coverage norms, SBI management says that an additional provision of Rs 5,000 crore is required to meet the stipulation of 70 per cent loan-loss coverage by September 2010. This could eat into its profits going ahead.

For ICICI Bank, gross NPAs in absolute terms declined by three per cent y-o-y owing to lower slippages and sale of retail loans worth Rs 700 crore to ARCIL. Around 70 per cent of gross NPAs continue to come from retail where personal and credit card loans continue to put pressure. Overall, experts say that gross NPAs, including restructured assets, could move up to around six per cent in 2009-10 from about 4.7 per cent currently.
 

Conclusion
Estimates suggest that ICICI Bank and SBI need to provide around Rs 1,800 and Rs 4,000 crore, respectively in the next four quarters in order to achieve the mandated provisioning coverage level of 70 per cent announced by RBI. However, we haven’t heard the last of provision coverage and any relaxation in the guidelines would be welcomed by both the banks. But, if implemented in the current form, SBI could witness a decline of around 5-10 per cent in net profit for 2009-10 as well as 2010-11. Positively, the re-pricing benefits could accrue and aid further expansion in NIMs in the next two-three quarters for the two banks. Any improvement in the credit growth would also boost earnings of the core banking business; nevertheless value-unlocking of their financial subsidiaries, especially life insurance, could act as triggers.

The stocks of SBI and ICICI Bank are trading at 1.4 times and 1.6 times, respectively their estimated 2010-11 book value, and can be considered on dips.

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