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ICICI: Asset risk

Sep 24, 2001

International rating agency Standard & Poor (S&P) has affirmed its ĎBBí long term rating on ICICI with a negative outlook due to the risk of increasing bad loans and declining profits. Despite ICICIís efforts to improve the asset quality, it is still regarded weak by international standards. ICICI has large exposure to sectors including power, textiles and steel. Projects in these sectors are highly linked to the economic environment in the country. Deterioration in these sectors will have an adverse impact on ICICIís loan portfolio.

The institution has successfully reduced the level of NPAs to 5.2% of net advances as March í01 by increasing the provision coverage to 50% from 34% in the previous year. During 1QFY02 also ICICI restructured assets aggregating Rs 14.4 bn and made provisions of Rs 320 m against these assets. This was reflected in a reduction in NPA ratio to 5.1% at the end of the June quarter. Disbursals to 'A' rated clients accounted for 92% of ICICI's total disbursements during the first quarter.

A shift towards retail
Break up of loan profile FY98 FY99 FY00 FY01
Manufacturing sector 58.3% 49.2% 40.8% 35.1%
Oil, gas and petrochem 8.7% 13.1% 12.6% 8.3%
Infrastructure 13.8% 13.3% 13.6% 13.6%
Corporate lending 19.2% 24.3% 32.2% 39.8%
Retail lending 0.0% 0.1% 0.8% 3.2%
Total 100.0% 100.0% 100.0% 100.0%

However, given the delay in revival of the economy, ICICI is likely to see a rise in its gross NPAs in the coming quarters and recovery process could slow down. This could force ICICI to make higher provision for NPAs, consequently a rise in requirement of additional capital.

Nevertheless, ICICI had a comfortable capital adequacy ratio of 15.1% as on June 30, í01. This is likely to facilitate the institution not only to clean up the balance sheet but also to grow its business operations. ICICI's disbursals in 1QFY02 grew by a marginal 6%. However, its retail finance disbursements doubled to Rs 11.4 bn and accounts for 3% of total assets. The institution is aggressively tapping the retail markets to diversify the loan portfolio and to improve the financial performance.

At the current market price of Rs 48, ICICI is trading at a P/E of 4x FY02 projected earnings. Its current Price/Book value ratio of 0.4x is the lowest in the past four years. ICICI is expected to report about 50% growth in profits even after considering the higher provision for NPAs (but excluding the impact of deferred taxation). FII investment in ICICI (including ADRs) was 48% as on March í01. The RBIís recent decision to increase the FII limit to the sectoral cap could act as a technical factor to drive the stock price (after ICICIís board approves the increase in limit). However, fundamentals of the institution are highly linked to the performance of the sectors including steel, textile and power, which constitute major portion of its loans.

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