ICICI Bank: The Slide Continues

ICICI Bank (IBN) is now under a new head, Ms. Chanda Kochar. She has been on record that in view of the changed environment, ICICI Bank will change tack, moderate its persuit of growth and pay more attention to containing risk. Let's look at how things have played out so far. Are the new initiatives working?

We will first compare FY09 performance to FY08 and look at the trends showing up. We will look at the latest FY10 June results versus FY09 June Quarter, to get a feel of where things stand.

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Strong Capital Base
A strong capital base is the number one issue to consider before investing in a lender.

ICICI Bank has its Capital Adequacy ratios at 14.73 percent much above the mandatory 9% requirement stipulated by RBI. However Gross and Net NPA (Non-Performing Assets) have continued to slide down to 3.68 percent and 1.74 percent respectively. This is among the highest in the industry, and the inability to arrest the continuing slide is cause for concern.

Return on Equity (RoE) and Return on Assets (RoA)
These metrics are the de facto standards for gauging bank profitability.

ICICI Bank has shown a drastic falling margins trend, with FY09 consolidated margins standing at a poor 5.58 percent, down marginally from a year ago. This is the main reason behind deteriorating RoA and RoE. Return on Equity figures show a dismal 7.57 percent. Compare this with the other leading private sector bank HDFC Bank with RoE at over 16 percent. That tells the story perhaps, of how things have gone wrong with too-aggresive a growth strategy pursued by ICICI Bank.

Efficiency Ratio
The efficiency ratio measures non-interest expense, or operating costs, as a percentage of income. Basically it tells you how efficiently the bank is managed. Many good banks have efficiency ratios under 55% (lower the better).

Cost-efficiency ratios are rising for the last 3 years, and are just under 55% at the moment. Forget the comparisons with other private banks, even PSU State Bank of India has a much better record here than ICICI Bank.

Net Interest Margins (NIM)
Another simple measure to watch is net interest margin, which looks at net interest income as a percentage of average earning assets. Track margins over time to get a feel for the trend.

Net Interest margins have shown some improvement with FY09 NIM standing at 2.4%. You can put this in perspective however when you compare it with HDFC Bank's (HDB) net interest margins at over 4% for the last few years and the gradually improving trend.

Strong Revenues
Historically many of the best-performing bank investments have been those that have proven capable of above-average revenue growth.

It has pared down its aggressive growth strategy. This shows in the 5yr CAGR growth track record of over 44 percent coming down to low single digit growth in FY09. Interest Income has grown by 6% while Fee Income has declined by about 15%. Deposits too have declined by ~5.5%.

Quarterly Performance! Is that any better?

The story so far is probably not that glum. But wait till you review the Quarter on Quarter performance. 1st Qtr FY10 vs 1st Qtr FY09.

That's a see of red, out there.

Let's start with the deposits. The Bank maintains low cost CASA (Current Account and Savings Account) deposits ratio has gone up to 30.4% from 27.6% a year ago. Well that has gone up, not because the bank has managed to attract additional low cost deposits, but because Fixed Deposits have declined by a whopping 16 percent (we know many investors shifting deposits away from ICICI Bank in 2008) with CASA deposits also declining marginally. Naturally CASA deposits as a percentage of Total Deposits ratio has gone up.

Fee Income has come down drastically by over 32 percent from year ago levels. Probably this is intentional. But this has been compounded with Interest Income also declining by almost 10 percent from 1st Qtr FY09 levels. Net Interest Income has declined by 5 percent because of a better show on Interest expenses declining by 11 percent.

The only positive thing to notice is that Capital Adequacy ratio has gone up to over 17 percent, almost double the mandated 9% rate prescribed by RBI. Net Profit also has increased by over 20%. We can see now that this is primarily because of Treasury Income showing a gain of Rs 714 Cr versus a loss of Rs. 594 Cr a year ago. Treasury income can be highly volatile.

ICICI Bank has much ground to cover before it can stabilize its operations and comfort investors. And miles to go before it can catch up with its peers on margins and profitability metrics.

You are well-advised to stay away, till you see a reversal in trends. Especially as its peers have all recorded stellar performances in FY09 as well as this 1st Qtr of FY10.

Disclosures: No positions in ICICI; long HDFC

Comments

[User 149220:]

Hi Donald,
Excellent Analysis. I was looking at the disclosures. It mentions No positions in ICICI; long HDFC. Do you mean HDFC Bank or are you saying HDFC itself. If not would that imply that you are staying out of the banking sector completely and are more bullish on Housing (NBFC).

Thanks.
Waiting for you next post.

An awed reader.

Aug 14 06:46 AM

[skwestorange:]

Very good and detailed analysis. I was thinking of getting long IBN. Now I will wait another quarter or two. Thanks

Aug 14 09:23 AM

[Focus Advisory:]

I concur with much of the article, but what the author fails to mention is the off balance sheet strength of ICICI.

Most notably, ICICI is majority owner of not yet profitable ICICI-Prudential...the largest non goverment owned insurance company in India.

Regards

Aug 14 12:55 PM

[Donald Francis:]

I hold HDFC Bank and Housing Development Finance Corporation (HDFC) too. Sorry about the typo.

Rgds
Donald

On Aug 14 06:46 AM User 149220 wrote:

> Hi Donald,
> Excellent Analysis. I was looking at the disclosures. It mentions
> No positions in ICICI; long HDFC. Do you mean HDFC Bank or are you
> saying HDFC itself. If not would that imply that you are staying
> out of the banking sector completely and are more bullish on Housing
> (seekingalpha.com/symbo...).
>
> Thanks.
> Waiting for you next post.
>
> An awed reader.

Aug 14 03:33 PM

[bobbyusd:]

Hi Donald, Congratulations again...you write that the Fee income going down could probably be intentional. But why would the bank do this, specially in turbulent times like the present one. Fee income going down by 32% is huge, when most of the banks as a strategic measure want to shore up fee income. Fee income not going up would also mean resources (human) lying idle ie their efficiency ratio should be over 55% if the downslide is not arrested.

Rgds
Bobby

Aug 15 04:15 AM

[Donald Francis:]

Thanks. I should have mentioned that.
My contention is that ICICI Prudential Lif Insurance is also the biggest drag on ICICI Bank consolidated results, dragging down the bottomline by a huge Rs 5.77 Bn down from Rs.10.32 Bn in FY2008.

It will be 2-3 years before ICICI Prudential Life Insurance starts adding to the bottomline, but till then ICICI Bank needs to show improved operating results, to inspire confidence.


On Aug 14 12:55 PM Focus Advisory wrote:

> I concur with much of the article, but what the author fails to mention
> is the off balance sheet strength of ICICI.
>
> Most notably, ICICI is majority owner of not yet profitable ICICI-Prudential...the
> largest non goverment owned insurance company in India.
>
> Regards

Aug 16 04:36 AM

[Harry Bharuchi:]

Excellent easy to understand. Please carry on good work. Thanks! Best regards; Harry Bharuchi

Sep 09 02:14 AM