ICICI Bank shares lose sheen as revenue growth remains weak

ICICI Bank shares lose sheen as revenue growth remains weak

The net profit of ICICI Bank Ltd in the March quarter was up 35% year-on-year (y-o-y) but down 9% sequentially. The results were mixed with weak revenue growth but profit propped up by lower operating expenses and provision charges.

Also See No Momentum (Graphic)

ICICI Bank’s loans declined 17% y-o-y in FY10 compared with 17% growth for the banking system. Loans grew 1% sequentially in the fourth quarter, showing positive growth for the first time in eight quarters. But this growth was entirely due to year-end priority-sector lending as the retail book continued to contract (down 3% sequentially). Growing the retail book materially remains a challenge as ICICI Bank has Rs20,000 crore worth of retail loans maturing in FY11 (about 25% of the current retail book). In FY11, we expect ICICI Bank’s loans to grow 10-12%, well below the estimated system growth rate of 20% as the new retail strategy will take time to deliver.

Net interest margin (NIM) remained flat at 2.6%, despite an improvement of 200 basis points in the current and savings account ratio to 42% and the bank’s high tier-I capital adequacy ratio (CAR) of 14%. Moreover, NIM expansion is likely to be challenging as high-yielding retail loans continue to get liquidated and the share of low-yielding international loans remains high. Retail loans now constitute 43% of the loan book compared with 58% as on end-FY08. The share of international loans went up from 21% to 25% during this period.

Gross non-performing loans (NPLs) rose by 6% sequentially to Rs9,600 crore. However, net NPLs declined by 16% y-o-y on account of high provisioning. The NPL coverage ratio improved to 60% at the end of the fourth quarter of FY10. The Reserve Bank of India has given ICICI Bank two extra quarters (until end-FY11) to raise the NPL coverage to 70%. However, technical write-offs will no longer be included in the coverage. Thus, provision charges are likely to remain high.

Although the performance of ICICI Bank UK (profit after tax, or PAT, of $37 million in FY10 against $7 million in FY09) and Canada (PAT C$35 million in FY10 against C$34 million in FY09) subsidiaries improved, these subsidiaries have a high level of capitalization (CAR of 17% and 23%, respectively), which is not generating adequate returns and, therefore, continues to depress the group’s return on equities. We expect returns from overseas subsidiaries to remain modest given limited lending and fee-generating opportunities in these markets compared with the pre-crisis period. 

The management maintains that the loan book should expand from hereon and is aiming for 20% growth in the domestic loan book for FY11 and 15% growth in the total loan book, assuming flat-to-declining trend in the international loan book (27% of the total in the third quarter of FY10). However, we believe 10-12% loan growth in FY11 is more realistic given that the bank has been out of the retail market for some time and can no longer afford to be a price leader in any segment. Domestic corporate and small and medium enterprises lending have not been the focus areas for the bank in the past, and it would take a while for the bank to find a foothold in these segments.

We upgrade our FY11 and FY12 earnings estimate by 6% to account for the favourable liabilities mix coupled with better cost efficiency. ICICI Bank’s stock has consistently underperformed its peer group and the market, be it over the past six months, two years, three years or five years. In the past three years, ICICI delivered 8% price appreciation compared with over 100% by most of its peer group, including Axis Bank Ltd (172%), Punjab National Bank (121%), State Bank of India (121%) and HDFC Bank Ltd (96%). ICICI Bank’s current valuations of 1.9 times FY12 price/book value appear reasonable versus those of other private banks—but that is without considering underlying profitability and growth prospects, both of which are likely to remain inferior for ICICI Bank. On price-earnings and price-earnings/growth ratios, ICICI Bank is expensive.

Graphic by Yogesh Kumar/Mint