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Bad loans rise at ICICI Bank

Bad loans rise at ICICI Bank
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First Published: Mon, Jul 23 2007. 01 12 AM IST

Updated: Mon, Jul 23 2007. 01 12 AM IST
The rise in interest rates has left its scars on ICICI Bank Ltd’s June quarter results. The bank’s net income was up a comparatively tepid 16% in the June quarter. Loan growth was very muted—advances outstanding went up a mere 1.2% over the end-March level. At the same time, margins worsened, with interest expended as a percentage of interest earned going up to a very high 77.3%, against 71.8% in the March quarter. Net interest margin fell from 2.66% in the March quarter to 2.3%—part of the reason being the higher cash reserve requirement. With retail advances constituting 64% of the bank’s loans, the high interest rates are hurting.
Low growth in net interest income was offset by higher fee income and by “lease and other income”. Among operating expenses, payments to and provisions for employees rose 46% year-on-year. The result: a 29% growth in core operating profit, compared with a 34% y-o-y growth in the March quarter, although higher treasury income and lower premium amortization of SLR securities led to a 58% y-o-y rise in operating profit.
But perhaps the most striking feature of ICICI Bank’s June quarter results is the increase in its bad loans. Net non-performing assets as a percentage of net customer assets increased from 0.98% at the end of March to 1.3% at the end of June. Gross non-performing assets have increased substantially, a clear indication that some of the excesses of the bank’s rapid growth are coming home to roost.
None of this has affected the ICICI Bank stock, which is up around 20% since end-March, in spite of a substantial equity dilution. Part of the reason is because the huge resources that the bank has raised will increase margins and boost advances. Another reason is that there has been a revaluation of its subsidiaries. (However, in the June quarter, although ICICI Lombard’s profits after tax, at Rs45 crore, are three times higher compared with the June ’06 quarter, ICICI Prudential Life Insurance Co.’s new business achieved profit, at Rs165 crore, is lower by Rs21 crore compared with the year-ago period.) But the main reason is that, if we are at the peak of the interest rate cycle and interest rates will now go south, the June quarter results are no guide to the future. It’s no surprise that K.V. Kamath, the bank’s managing director and CEO, has said that current rates of interest could hurt growth.
Cement results
The markets seemed lukewarm to cement companies’ June quarter results, what with the stocks of ACC Ltd, Ambuja Cements Ltd and UltraTech Cement Ltd moving in a 2% band post-results. For one, cement shares have risen sharply in the past month and could well be taking a breather. Besides, the results weren’t all that exciting. ACC reported an 11.5% increase in net revenues quarter-on-quarter, driven by a 9% rise in volumes. But operating profit rose just 7.4% as higher raw material costs and overheads ate into margins. Ambuja Cements did worse, with a mere 2.1% increase in revenues and a 1.4% drop in profit.
UltraTech Cement had revenues falling 6.8% sequentially, but operating margin rose sharply leading to a 6.1% rise in profit.
A quarter-on-quarter comparison makes better sense because of the high increase in realizations in the past year. The fact that only Ambuja has seen a drop in profit over the March quarter is simply because the company is absent in the South, where price realizations have continued to improve.
ACC and UltraTech get about one-fourth of their revenues from the South, which explains the rise in their average realizations. Ambuja also suffered from low volume growth as it’s operating at peak capacity. Further, freight costs rose at a sharp rate, leading to 140 basis points hit on margin.
Analysts point out that ACC’s overheads increased on account of consultancy costs, SAP implementation, re-engineering and IT expenses. These expenses may, however, come down in the future.
But while the June quarter results may have given mixed signals for different cement companies, the future looks bright for most of them, at least for the next couple of years. Cement capacities that were expected to come onstream to take care of the demand-supply mismatch are delayed, and companies will continue to benefit from the buoyancy in prices for some time.
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First Published: Mon, Jul 23 2007. 01 12 AM IST