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ICICI Bank: Research meet excerpts

Apr 13, 2010

The last time we met ICICI Bank was around six months back. The country's second largest bank was then unsure of how small it would eventually become. When we met it again this time around, the bank seemed to offer more clarity on a host of aspects. That included growth, profitability, business approach, asset quality. But most importantly - its learning from past mistakes. Here are the key excerpts of our research meeting with the management of ICICI Bank. ICICI Bank has cut down its balance sheet size by around 15% in the last two fiscals. It has lost its market share in retail products such as home loans, auto loans and credit cards to private and public sector peers. But the bank's management has finally drawn its attention to the much deserved areas. Those of low cost deposits and franchise. Although seemingly time consuming, this approach could have saved ICICI a lot of the post-Lehman blushes, if implemented earlier. Nonetheless, better late than never!

ICICI Bank does not see itself reducing its balance sheet size further in the next fiscals. However, it will certainly not be amongst the fastest growers. Infact the bank is targeting loan growth of around 15% YoY in FY11. This would be 0.8 to 0.9 times the average sector growth. Most of the incremental growth is expected to come in from large corporate and SME clients. The ratio of retail, large corporate and SME customer base in its loan book is expected to settle at 40:40:20 in the next two years.

The key rationale towards this product alignment is keeping in mind the respective spreads. ICICI Bank believes that given its cost disadvantage, offering competitive home loans at thin spreads (8% teaser loans) could be suicidal for the bank. And hence while it will resist from offering cheap retail loans like its peers. It will instead be targeting corporate and infrastructure related project loans. With a targeted low cost deposit (CASA) base of 34%, the bank hopes to sustain net interest margin (NIM) of around 2.8%.

Lack of focus on asset quality is what brought ICICI Bank to its knees during the days of credit crunch. But the bank seems to have taken some important lessons from this experience. It has tightened its lending and well as provisioning policies. However, that does not mean the worst is over for ICICI Bank. It is expected to carry restructured assets worth Rs 60 bn on its books at the end of FY10. While ICICI Home Finance has gross NPAs at around 1.25% of advances, the slippage on credit cards and personal loans have been close to double digits. Not denying an improvement in asset quality in the long term, the medium term prospects are certainly not rosy.

ICICI Bank believes that many of its peers (PSUs and private) are committing the same mistake that it did in the past. That of lending money at very cheap rates. The bank believes that while it is easy to grow the loan book by lending cheap, recovering it is the real challenge.

ICICI Bank plans to secure its future growth in terms of margins as well as quality. For the same it is currently focusing on building a larger franchise and low cost deposit base. Besides ensuring better margins this is also expected to improve the bank's credit quality. However, the bank believes that it will be some time before its return ratio come at par with that of its peers. This is also due to the bank's lower leverage ratio. ICICI is targeting return on asset of 1.3% and return on equity (ROE) of 12% by FY12. While we believe that these target may be met with a marginal delay, investors would do well to remain cautious of the stock's valuations at the current levels. Having said that, ICICI Bank if guided well, may turn out to be an interesting story in the long term.

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