ICICI Bank

ICICI Bank: Hard times
Mumbai July 29, 2008,

A slower loan growth could hurt profits.
One reason why ICICI Bank has seen a 6 per cent fall in its net profit for the June 2008 quarter is that its total income has barely budged. The interest earned from loans—the bank’s core business—is up just 5.6 per cent and it is the 37 per cent rise in income from fees that has pulled up the topline. Treasury losses of close to Rs 600 crore too have hurt profits.

If the fall in the bottomline isn’t sharper, it is because the bank has managed to keep costs in check. Thanks to a higher share of cheaper current and savings accounts (CASA), which went up by about 500 basis points, it has paid less to borrow .That’s why the net interest margin (nim) has risen by 45 basis points y-o-y to 2.4 per cent and stayed flat sequentially. Besides, expenses on direct marketing have been slashed.

The loan book has grown by just 13 per cent for the stand-alone entity while for the consolidated entity, it was up 20 per cent. The management says it will scale back retail loan targets to 5-10 per cent this year though the corporate book could grow by about 25 per cent.

Given that fee incomes will not be as easy to come by — especially in the derivatives segments, the bank could grow at a slower pace this year. Margins may remain stable with the bank able to access more low cost deposits from an expanding branch network.

The real problem area, however, is the rising quantum of non-performing loans (npls). Net npls are up at Rs 1,300 crore compared with Rs 1,100 crore in the March 2008 quarter: loan defaults could increase in a weakening economic environment.

The ICICI Bank stock came off by close to 10 per cent on Friday to close at Rs 656.85. At this price, the stock trades at about 1.1 times estimated FY09 book value and is not expensive. However, the worst may not be over given that the environment remains challenging.