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ICICI Bank: Research meet excerpts - Views on News from Equitymaster
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ICICI Bank: Research meet excerpts
Feb 11, 2005

Our recent one to one meeting with ICICI Bank gave us an insight into the dynamics of the Indian banking industry and the factors that will drive the growth and competition in the industry, as well as for ICICI Bank per se. Following are key excerpts from the same:

Macro aspects
Where is the credit growth in the sector emanating from?
The revival of demand in the non-food credit segment has been seen across most industry groups and a faster pace of growth on the retail side has supplemented the same. The cash rich corporates have so long been funding their credit requirements through their internal accruals and external borrowings. However, of late, the banking entities have also been able to garner a share in the pie. According to the bank, the demand for credit has been predominantly to meet the working capital requirements and the oft-contemplated capex plans are yet to follow.

Talking of the share of demand: 40% to 45% has been from the retail segment, around 25% has been from the corporate segment and the balance 30% from agri, real estate and other miscellaneous sectors.

Quality of credit growth
The growth in the corporate credit appetite seems to be following the trend seen in the mid 90’s. Will it counter similar consequences? The bankers opine otherwise. The credit demand in the mid 90’s differed from those witnessed in recent times on three aspects:
  1. Nature of entities
  2. Medium of financing
  3. Nature of expansion


Companies with lower capacities embarked on large-scale expansions and undertook projects that were not commensurate with their capacities. Moreover, demand expectations were a bit too optimistic. The projects involved huge and high cost leveraging in a time when the cost of equity was also high. Companies also succumbed to the vices of ‘over-diversification’ as they ventured into unrelated businesses.


Companies getting into capacity expansions already have a reasonable asset size to fall back upon. Also, funding is largely equity based or though internal accruals with very little reliance on debt. As against earlier times, a large number of banks are willing to participate in the projects and there is no single entity having a large exposure. Besides, the expansion is largely concentrated on the current business areas and is not aimed at diversification.

Interest rate movements and the credit demand elasticity with respect to it
The interest rate movements in the near term are not expected to witness much volatility and will be predominantly influenced by the demand or supply of money. As the levers to control the money supply in the economy (market stabilization bonds and the like) are in place, interest rates do not hold much scope for revision. The bank does not see any elasticity in the credit demand, unless there is a revision beyond 1% to 1.5% with an upward bias.

Micro aspects (relating to ICICI Bank)
Saddled with ICICI debt legacy

The bank suffers from margin pressures on its NIM (Net interest income/average earning assets) as well as interest spread mainly due to the high cost debt burden of the erstwhile ICICI. The bank is still carrying debt of ICICI to the tune of Rs 200 bn (16% of its balance sheet size) in its books and servicing interest at the rate of 10.5% on it. Offloading the ICICI burden at the earliest is the only solution to bringing down the bank’s cost of funds and the bank is gradually heading towards it. This liability is expected to reduce to Rs 100 bn by 2006 and will then contribute a marginal 8% of the bank’s total liability (based on current size).

Potential growth in volumes and margins
The bank is hoping to capitalize on the retail and corporate credit appetite and envisaging these segments to grow its loan book by 30% and 20% respectively. The demand is expected to emanate 50% from mortgage financing, 30% from vehicle financing and the rest from credit cards as well as dealer financing. The net interest margin (NIM) of the bank at present stands at 2.4% and this is expected to go upto 2.9% in the next 5 to 6 quarters.

Not very proactive on NPA front

Despite having net NPAs to the tune of 2.3% of total advances (higher than most of its peers) the bank does not seem to be very proactive in restricting the same. In case of retail assets, the net NPA to advances figure is 0.65%. Given the aggressive growth strategy followed by the bank, the likelihood of a further slippage in its asset quality remains high.

Project finance not a priority

The bank does not foresee any major asset growth in its project finance business, as its ‘long-term fixed lending’ nature does not stand to be of any advantage to the bank. Major portion of the businesses garnered will be securitised and the bank will only focus on the fee income revenue. Fee income will be derived from the bank’s advisory services such as project appraisals as well as from due diligence, bank guarantees etc.

‘Banking’ on aggressiveness

The bank is optimistic about its ‘aggressive’ stand aiding future growth. The logic is that the retail segment of its asset book that comprises 61% of total advances (expected to go upto 70% in the next 2-3 years) contributes a marginal portion of its bad assets, and it is the volumes derived from the aggressiveness that will bring in the economies going forward.

Our view
Based on our interaction with the bank, we believe that ICICI Bank certainly warrants better valuations going forward once it is relieved of ICICI debt legacy. With additional capital infusion (its CAR having improved from 10.4% in March’04 to 13.5% in December’04), the sustainability of its growth momentum is also not a concern. But what remains a matter of our discomfort is the bank’s seeming complacency on the NPA front. Also, the possibility of its aggressive approach bringing negative surprises for the bank warrants a certain degree of caution.

At the current price of 376 the bank is trading 2.1 times its 9mFY05 book value, which puts it at the higher end of our valuation band (1.5x to 2.5x). Although going forward, relieved of ICICI’s debt burden, the bank’s earnings are expected to justify the valuations, the possibility of slippage in its asset quality looms large. To that extent investors need to exercise caution.

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Feb 21, 2018 11:03 AM


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