Taking a breather

 

Taking a breather

Sarath Chelluri / Mumbai May 4, 2009, 0:24 IST

 

The bank plans to go easy on lending this year and will focus on accessing low cost deposits.

It will be hard to imagine ICICI Bank without Kundapur Vaman Kamath. Of the thirteen years that Kamath was at the helm, the most trying period would most certainly have been 2008-09. A year when the credit market turned alarmingly weak and when interest rates were at their most volatile, it showed up ICICI’s Bank’s weaknesses.

The bank’s oncehailed aggressive retail growth strategy had proved to be somewhat too aggressive, leaving it with heaps of non-performing loans (npls) and little in terms of profits. The new MD and CEO Chanda Kochhar is stepping on the brakes—she says ICICI will not grow its balance sheet for about a year though the bank would continue to lend around Rs 30,000 crore that it received from loan repayments.

Turning around?
That’s probably the right approach today. Already, the March 2009 quarter numbers show signs of a turnaround. Although net profits were down 35 per cent, the quality of earnings has clearly improved; the bank’s net interest margin (nim) rose 20 basis points sequentially to 2.6 per cent because it borrowed less in the wholesale market and the share of cheaper current and savings accounts (CASA) rose by 130 basis points sequentially to 28.7 per cent.

Kochhar says her focus will be on mobilising low cost money—around 600 branches are being added to the existing network of 1,400—and she expects CASA to hit 33 per cent by the end of this year. Of course, ICICI Bank’s margin was way below that for peer HDFC Bank, which reported a nim of 4.2 per cent driven by a much higher CASA at 44 per cent.
 

ICICI BANK’S GOING CHEAP
(in Rs crore)	ICICI Bank		HDFC Bank
	FY 09	FY 10E	FY 09	FY 10E
NII	8,367	8,922	7,421	9,443
Other Income	7,604	8,171	3,291	3,697
Operating profit	8,925	10,249	5,179	6,281
Net profit	3,758	4,142	2,245	2,837
P/E	14.1	12.8	21.2	16.7
P/BV	1.1	1	3.2	2.5
E: Analysts’ estimates

 

Not the end of NPLs
Nevertheless, the Street was pleasantly surprised and believes the worst may be over especially since delinquencies appear to have stabilised. However, although the accretion to non performing loans (npls) in the March quarter, at Rs 1,250 crore, was more or less at the same levels as in the December 2008 quarter, it’s possible more assets may be restructured, especially corporate loans. Gross npls have moved up to 4.32 per cent from 4.14 due to slippages in the retail book and there could well be a further deterioration in asset quality.

However, the quantum of increase in npls is likely to be smaller going ahead and therefore, not debilitating. If one considers the restructured assets, including the applications that are pending, the gross npls would be higher while the coverage ratio which is now 52 per cent would drop sharply.
 

HOW THEY FARED LAST YEAR
(in Rs crore)	ICICI Bank		HDFC Bank
	FY09	% chg	FY09	% chg
Interest Earned	31,093	1	16,332	60.6
Interest Expenses	22,726	-3.2	8,911	82.3
Net Interest Income	8,367	14.5	7,421	40.4
Non-Interest Income	7,604	-13.7	3,291	47.8
Total Income	15,970	-0.9	10,712	42.6
Operating Expenses	7,045	-13.6	5,533	47.7
Pre-Prov Profit	8,925	12.1	5,179	37.5
Provisions & Cont.	3,808	31.1	1,880	26.6
PAT	3,758	-9.6	2,245	41.2
Advances	218,311	-3.2	98,880	55.9
Deposits	218,348	-10.7	142,810	41.7

 

Taking a break from growth
Confronted with these challenges, ICICI has dropped the pace; its loan book contracted by 3.2 per cent y-o-y in the March 2009 quarter and analysts believe the bank may grow its assets by just about 8-10 per cent in the current year.

Fortunately, the bank is armed with sufficient capital: the capital adequacy ratio stands at 15.5 per cent so it can take advantage of a pick-up in demand for credit. However, a changing portfolio mix in favor of corporate loans could bring down yields though it would mean lower delinquencies.
 

ADVANTAGE HDFC BANK
(in %)	HDFC Bank		ICICI Bank
	FY 08	FY 09	FY 08	FY 09
NIM	4.4	4.2	2.1	2.3
CASA