Retail lending slows at ICICI Bank

Retail lending slows at ICICI Bank
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First Published: Sun, Jan 20 2008. 11 48 PM IST
Updated: Sun, Jan 20 2008. 11 48 PM IST
Asset quality continues to deteriorate at ICICI Bank Ltd, with net non-performing assets (NPAs) rising to 1.47% of net customer assets at the end of December 2007, compared with 1.41% at end-September. But that’s a trend that was widely expected. The good news is that bad loans are not rising as rapidly as they did during previous quarters. Gross NPAs rose by Rs1,193 crore in the June quarter, by Rs646 crore in the September quarter and now by Rs557 crore in the December quarter.
Also as expected, the bank’s loan growth slowed down substantially last quarter, with advances growing by 24.7% year-over-year at 31 December 2007. At end-September, that growth was 33.3%. The deceleration in retail loan growth was dramatic, falling to 12% year-on-year at 31 December 2007, compared with 22% at 30 September 2007.
Compare that to HDFC Bank Ltd’s 21.7% year-over-year growth in loans to individuals as on 31 December and it’s clear that ICICI Bank is going slow in lending to the retail sector.
Its retail advances constituted 61% of total advances at end-December, compared with 63% at the end of September. In sharp contrast, loans from the bank’s international branches are rising rapidly.
Deposit growth at end-December was 17%, but the bank has been successful in increasing the proportion of its low-cost current and savings accounts to 27.2% from 25.3% at the end of September. That helped the bank raise its net interest margin slightly to 2.3%. But net interest income growth was lower than in the September quarter because of the deceleration in lending. Growth in fee income, however, was a high 32.7%, well above the 25.4% growth in the September quarter. The net result: diluted earnings for the quarter were Rs10.99 per share, compared with Rs9.08 in the September quarter.
A lower return on equity and rising NPAs have weighed down the ICICI Bank stock (see chart). But the December quarter results show improvements in lowering the cost of deposits, a deceleration in the pace of NPA growth and an increasing focus on international operations. Its plans to rapidly increase branch network will further lower its cost of deposits, improving the prospects for its core banking business.
The market has, however, been more interested in recent times about the company’s non-banking businesses. Before the market crash, the stock had run up sharply after the company outlined its plans for these businesses. Analysts revised their target prices upwards, imputing a higher value to the bank’s subsidiaries. Broking firm Prabhudas Lilladher, for example, says that the subsidiaries contribute 35% to the target price, with the life insurance venture estimated to contribute 22%. However, ICICI Prudential Life Insurance Co. Ltd’s share in overall market (including Life Insurance Corp. of India) has gone down to 7.6% over the April-November period, compared with 9.6% over the April-August period.
The immediate trigger for the stock will be the private placement and subsequent listing of ICICI Securities Ltd. Analysts say that the broking firm plans to ramp up its offline business by adding a thousand sub-brokers in the next 15-18 months, taking the total number to around 2,000 and almost trebling its points of presence. Considering its leadership position in online broking and its ability to offer a wide variety of financial products, there’s no reason why ICICI Securities will not be able to realize the potential in this business.
Idea Cellular
After reporting flat sequential growth in operating profit and a mere 5.9% increase in revenues in the September quarter, the 11% rise in Idea Cellular Ltd’s operating profit last quarter seems impressive. Revenues, too, grew at a much higher rate of 9.3% sequentially. But analysts aren’t impressed. Many of them had estimated a double-digit growth in revenues, especially since it came off a low base in the September quarter. And for the same reason, one would have expected profit margin to improve by a greater degree. Idea reported a mere 50 basis points increase in operating margin, as network operating expenditure continued to soar. Network expenses hit margins by 180 basis points because of rapid expansion in the company’s network. The company had explained in its call with analysts last quarter that revenues related to newly rolled out network generally come with a lag, and hence impact margins in the quarter.
But Idea is facing another problem. Due to an increase in competition lately, the rate it is able to realize for every minute of traffic has reduced by 7.5% sequentially to Rs0.74. In the September quarter, it had reduced by nearly 5%. In the past, a reduction in rates would lead to an increase in usage by customers. But for various reasons, one of them being that new customers are from a low-income group, minutes of usage hasn’t picked up commensurately. In the last two quarters, average rates have dropped by 11.9%, but average minutes of usage per customer have remained steady at around 380. As a result, average revenue per user (Arpu) has declined about 13% in the last two quarters to Rs279, after remaining steady at around the Rs320 levels for three straight quarters.
Given these pressures and the constraints on spectrum allocation for incumbents in the global system for mobile communications (GSM) space, Idea Cellular’s shares haven’t done too badly. They’ve fallen about 13.7% from their highs in October, before the new spectrum allotment norms became public, and have done much better than shares of Bharti Airtel Ltd, which lost 22.3% in value. But then, the company has received spectrum for new circles such as Mumbai, and will begin operations sooner than the market’s expectations. Even so, the enterprise value of more than 18 times trailing 12-month earnings before interest, taxes, depreciation and amortization (Ebitda) factors in exceptionally high growth in the future.
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First Published: Sun, Jan 20 2008. 11 48 PM IST