How fortunes have changed.
A year ago, ICICI Bank Ltd was the bank of the future, riding the retail banking wave and growing so rapidly that the market had no hesitation in valuing it higher than State Bank of India (SBI). The former was perceived to be aggressive, nimble and smart, while the latter was seen as stodgy, staid and moth-eaten.
But that is yesterday’s story. The results for the June quarter that came out over the weekend paint a completely different picture.
Loans and deposits
Consider loan and deposit growth. Over the year ended 30 June, ICICI Bank’s loans grew at 13%, less than half the 30% growth rate in SBI’s advances. Deposits at ICICI Bank increased by a mere 1.6% year-on-year, compared with 25% at SBI. What’s more, ICICI Bank’s outstanding deposits as well as loans contracted between April and June. Advances fell 0.6% and its deposits went down by 4% over the period.
For SBI, deposits were up 5.6% and advances 6.2% in the same interval.
In fact, ICICI Bank is rapidly slowing down its growth. Its year-on-year loan growth rate has come down from 24.7% at the end of December 2007 to 15.2% by March-end and to 13% by the end of June. Similarly, the bank’s year-on-year deposit growth has slowed from 16.7% at December-end to 6% by March and to 1.6% by end-June.
ICICI Bank’s earlier aggression has rapidly evaporated and it’s now reaping the consequences of some of its hubris. Take a look at the continuous rise in bad loans—gross non-performing assets (NPAs) increased by 54% over the past year, while net NPAs rose by 50%. In contrast, SBI’s gross NPAs were up a mere 0.2% over the year-ago period and they’re actually lower than where they were in March.
A year ago, on 30 June 2007, ICICI Bank’s net NPA ratio was 1.33% and SBI’s 1.62%. Today, the positions have been reversed: ICICI Bank’s net NPA ratio is 1.74%, while SBI’s is 1.42%. ICICI Bank’s earlier focus on growth at all costs is taking its toll.
It does make sense for ICICI Bank to concentrate on improving its profitability instead of growth in the current environment, by controlling costs and raising its share of low-cost deposits. Unfortunately, its earlier reliance on treasury operations to boost profits makes it difficult to show profit growth at present.
In the June quarter, interest expended at ICICI Bank was lower than in the year-ago period. That has helped raise net interest income substantially. On the expenses side, operating expenses, which rose by just 10.5% year on year despite an increase in the number of branches, have been kept in a tight grip and the decision to originate non-priority sector home loans from its subsidiary ICICI Home Finance Co. Ltd has enabled the bank to reduce expenses on direct marketing agents. Employee cost is flat compared with a year ago. The result has been a sharp rise in core (non-treasury) operating profit.
But although ICICI Bank’s fee income increased by 35%, its treasury operations recorded a loss of Rs594 crore against a gain of Rs195 crore in the year-ago period. Add to that a 43.5% rise in provisions and net profits declined by 6% from Rs775 crore in the first quarter of fiscal 2008 to Rs728 crore in the same quarter this fiscal.
Now consider what happened at SBI during the same quarter.
A large part of the top-line growth is on account of non-interest income, which is up 111% year on year. While fee income growth is up a good 45%, most of the rise in non-interest income is not from core operations. For example, profit on sale/revaluation of investments was Rs222.8 crore in the June quarter, compared with a loss of Rs436.7 crore under this head a year ago. Dividend income increased year on year by Rs213.9 crore, subsequent to a change in accounting rules for recognition of dividend receipts.
Putting it another way, the growth in profits on sale/revaluation of investments and the growth in dividends contributed 69% to the growth in SBI’s non-interest income. Also, while total operating expenses have increased a mere 9%, that’s because growth in staff expenses is just 5%, thanks to much lower “contributions for employees”, on account of higher provisions made earlier.
SBI’s provision for depreciation of securities has been a huge Rs1,656 crore in the June quarter, compared with a write-back of Rs376 crore in the year-ago period. This provision includes Rs784 crore on the bonds that the government gave the bank in lieu of cash when it subscribed to the bank’s rights issue—it’s ironic the bank has to suffer for the privilege of allowing the government to subscribe its rights portion through bonds rather than by cash. The bank wrote back loan-loss provisions amounting to Rs247 crore, thus offsetting some of the depreciation losses. The final result: net profits increased by a respectable 15% to Rs1,640 crore.
Of course, ICICI Bank and SBI are very different creatures and the problems they face are very different. SBI has the benefit of its large network of branches, a high proportion of current and savings accounts and it benefits more from the farm loan waiver. It’s also possible that while the slowdown in the economy has first started to hit retail advances, it may soon spill over to the corporate sector, which is when SBI will get hit by rising bad loans.
But, with the benefit of hindsight, it now looks as if the market had placed too high a premium on ICICI Bank earlier. That is now getting corrected.
A year ago, on 27 July 2007, ICICI Bank’s market capitalization was at a 5% premium to SBI’s. At present, SBI’s market value is at a 25% premium to ICICI Bank’s. That sums up the change in the past year.