Unfortunately, ICICI Bank Ltd’s capital conservation strategy couldn’t conserve its net worth during the March quarter.
During the quarter, dividend payments eroded the bank’s net worth from Rs50,035 crore at the end of December to Rs49,533 crore by end-March. Book value per share, which was Rs449.50 at the end of December, fell to Rs445 by the end of March.
The positive feature of the March quarter results was that both loans and deposits increased, after a long period of steady contraction. Much of the loan increase was in the rural sector, with year-end targets having to be met.
The increase in loans, as well as higher net margins on account of a bigger proportion of low-cost current and savings accounts (CASA), led to a 2.9% year-on-year (y-o-y) growth in net interest income. That’s higher than the y-o-y growth in the December quarter.
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But that improvement was offset by a sharp y-o-y fall in fee income, while treasury income was much lower than during the December quarter. The upshot was that profit after tax, at Rs744 crore, was not only 35.3% lower than in the year-ago period, but it was also 41.5% lower than in the December quarter.
Ironically, the effective tax rate has also gone up for the bank, because its earlier income included a substantial amount of capital gains, which is no longer present.
The bank management said in a conference call that they do not intend to step up lending growth until the CASA ratio goes up to 33% of total deposits from the current level of 28.7%. Since this 33% CASA is also the target for fiscal 2010, investors can forget about expecting growth from ICICI Bank this fiscal. That’s all the more so because the management expects fee income growth to show a similar trend in the next two quarters.
The other major concern about ICICI Bank has been its bad loans. The management said that after adjusting for write-offs and amounts sold to asset reconstruction companies, the increase in gross non-performing assets (NPAs) during the quarter was Rs1,250 crore, most of the delinquencies coming from the bank’s retail loans. In the December quarter the comparable figure was Rs1,200 crore. For FY09 as a whole, total addition to gross NPAs was Rs6,000 crore. So there hasn’t been much of an improvement there.
Bear in mind also the Rs1,115 crore worth of restructured assets during the quarter and the Rs2,000 crore worth of applications for restructuring, which together give a better idea of the extent of distressed assets. The bank management said that while credit card and unsecured loan losses are likely to increase, the proportion of such loans is coming down. On the corporate side,however, restructuring will continue.
Another area of concern is in the bank’s overseas subsidiaries. The bank’s UK subsidiary saw a net profit of $6.8 million (Rs33.93 crore) in FY09, but that’s mainly the result of certain changes in accounting standards made in October last year. If these changes had not been made, the UK subsidiary’s pre-tax profit would have been lower by $58.5 million.
In other words, it would have incurred a loss. During the March quarter, the UK subsidiary’s mark-to-market losses rose to $163.9 million, from $71 million at the end of December.
ICICI Bank’s Canadian subsidiary’s net profits for FY 09 was 33.9 million Canadian dollars (Rs139.25 crore), but profits during the nine-month period ending December were C$32.9 million, so clearly profits were very low in the March quarter. Mark-to-market write-downs contributed to the decline. The bank’s subsidiaries shrank during the quarter, with the assets of the UK subsidiary going down from $7.6 billion at the end of December to $7.3 billion at the end of March 2009.
Similarly, the Canadian subsidiary’s assets went down from C$6.5 billion at December-end to C$6.4 billion at end-March.
ICICI Bank Eurasia Llc.’s balance sheet has also been shrinking. The management said that in FY10 a net $1 billion worth of overseas borrowings will have to be repaid or rolled over.
While ICICI Bank’s strategy is certainly the right one for it, the results for the March quarter show that the road out of the woods is a long and arduous one. The recent management changes are not going to make the job easier.
Graphics by Ahmed Raza Khan / Mint
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