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ICICI Bank: NPA challenge remains - Views on News from Equitymaster
 
 
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  • May 6, 2003

    ICICI Bank: NPA challenge remains

    ICICI Bankís merger with ICICI Limited, has made it FY03 results non comparable. As was expected, the topline as well as the bottomline has shown significant growth due to the merger. But it is not a rosy picture all along. The universal bank still grapples with the problem of excessive NPAs in its books. In this article we take a look at the FY03 results in detail and key takeaways from the bankís analyst meet.

    Though the income statement is not directly comparable, a year-end comparison of the balance sheet is made possible, as the bank had reported its FY02 balance sheet post merger. And relying on this balance sheet comparison we are trying to deduce the quarterly income performance.

    Advances (Rs bn) 1QFY03 2QFY03 3QFY03 4QFY03 FY03
    Total 470 489 500 533 533
    Retail 84 120 153 191 191
    Retail (% of total) 17.9% 24.6% 30.6% 35.9% 35.9%

    To put things in perspective, the bank has reported a 13% rise in advances for FY03 while its retail advances have grown by nearly 200%. That means of the incremental growth in advances to the tune of Rs 62 bn, 200% was contributed by the retail segment. This indicates that the bank has effectively cut back on its other assets while significantly growing its retail portfolio. The bankís income statement is however not comparable, as the merger of the income statement is not accounted for in FY02. Therefore, a sequential quarterly comparison (QoQ) is warranted.

    Income (Rs bn) 1QFY03 2QFY03 3QFY03 4QFY03 FY03
    Interest income on advances 14.7 14.7 15.2 15.6 60.2
    Income on investments 8.1 7.4 6.5 7.1 29.1

    Since the bank has reduced its corporate assets we safely assume that the growth in interest income from advances was mainly brought about by growth in retail assets. While the interest income of advances has risen on a QoQ basis, interest income from investments has reduced. This can be attributed to the falling yields of government securities. Incremental investments have been made at lower yields.

    Deposits (% of total) 1QFY03 2QFY03 3QFY03 4QFY03 FY03
    Savings 22.9% 23.8% 23.3% 22.1% 22.1%
    Current 10.9% 13.4% 11.9% 11.2% 11.2%
    Term 66.1% 62.8% 64.8% 66.7% 66.7%
    Total 100.0% 100.0% 100.0% 100.0% 100.0%

    While net interest income growth is not comparable YoY, we must point out that interest spread has fallen in FY03 to 1.3% from 2.2% in FY02. Even this statistic is not comparable as erstwhile ICICI Bankís cost of funds is not included in FY02 results. But the indications are that going forward ICICI Bank is likely to improve its interest spreads, mainly due to higher proportion of retail deposits in total deposits. Retail deposits now account for nearly 60% of total deposits. Also the bank has aggressively repaid ICICIís high cost liabilities, thus helping reduce interest costs further.

    One area of concern regarding ICICI Bank has been its high level of NPAs, mainly brought about by the erstwhile ICICI Limited. For FY03 net NPAs to net customer assets ratio still stands at a high of 4.9%. While it is lower than the RBIís stipulated level of 5%, it is comparatively higher than its private sector peers like HDFC Bank, UTI Bank and IDBI Bank. An industry wise net NPA statistic for ICICI Bank shows that maximum NPAs are from the iron and steel, textile, fibre and engineering industries. As a percentage of total NPAs, NPAs from the steel industry have reduced in FY03, thus indicating that NPAs from the steel industry have come down. But on the flipside, NPAs from all the other major sectors seem to have increased.

    Also, it is disturbing that net NPAs to net customer assets ratio stood at 4.9% in FY03 compared to 4.7% in FY02, despite aggressive provisioning in FY03. Also as a percentage of net worth, net NPAs stood at 45% in FY03. In the analyst meet, the management made a distinct impression that further infrastructure expansion may be subdued. Also the growth in assets from this point on may be lower than that seen FY03 but on a higher base. The management emphasis remains on reaching a critical size to take on large public sector banking peers.

    ICICI Bank had undertaken a very aggressive initiative to expand its reach across the country. As far as asset growth is concerned, the bank seems to have reaped the benefits of this aggressive growth. From here on, the emphasis may be to sweat existing infrastructure in order to grow its asset base further. The focus however remains squarely on the retail segment. One of the most disturbing features of the results however remains the high level of NPAs the bank carries in its books. And there have also been questions raised on the payout of such high dividends by the bank. From here on ICICI Bankís valuations will depend largely on its ability to tackle the issue of NPAs effectively. Until then the stock price of the bank is likely to languish.

     

     

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