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ICICI Bank: Capitalising on Retail

Dec 3, 2004

“The largest provider of retail finance delivering unique value proposition to customers”. Thanks to the paradigm shift in the customer preferences and expectations from the banking industry, ICICI Bank (the only identifiable universal bank in the country) is able to make such claims and leverage on its competencies to access mass retail asset pools. ICICI Bank, with an outstanding book size of Rs 4,000 bn as of September 30, 2004, sees the current fiscal to be a trailblazer, having grown 38% from Rs 2,900 bn on March 31, 2004. The retail disbursements grew by 75% from Rs 191 bn in FY03 to Rs 334 bn in FY04. An analysis into what propelled the bank to aggressively augment its retail portfolio (retail advances comprised 23% of total advances in FY04 as against 18% in FY03) leads us to some interesting conclusions:

Stretched margins: ICICI Bank’s spread is lower than that of other banks due to the high cost liabilities of the erstwhile ICICI and the maintenance of SLR and CRR on these liabilities, which were not subject to these ratios prior to the merger. The bank has witnessed a substantial rise in deposits in recent quarters due to the execution of its strategy of replacing the maturing high cost borrowings of ICICI with the low cost deposits. Although yields on the domestic debt market have been moving up (the 91-day treasury bill cut-off yield has also moved up by about 120 basis points since March 2004, and the yield on 10-year Government of India securities has risen by 200 basis points) the retail credit disbursals seem to fetch the bank a better bargain.

The recent hike in lending rates, including those on home loans by 25 to 75 basis points seems to make the picture better.

Fee income potential: The fee income increased by 39% YoY primarily on account of retail products and services (read home loans and credit cards). Also, for cross selling products of its subsidiaries, the bank leveraged on its retail strength.

Asset quality also matters: The bank has made a deliberate attempt to skew its credit portfolio in favour of retail in an attempt to arrest the high delinquency rate of the corporate loans. This has enabled the bank to improvise on its coverage ratio (Total provisions / Gross NPAs).

The bank has also securitised assets worth Rs 107 bn in FY04, so as to gain liquidity and park the funds in retail assets, which appear to be a safer haven.

Funds need to be deployed: The bank has recently completed its public issue mobilising Rs 35 bn, thus enabling it to tap the significant growth opportunities on the lending side. Reiterating the fact that growth for retail credit is coming out of fundamental changes in the Indian demographic profile and is all set to balloon further, ICICI Bank is firmly positioning itself to capitalise on these gains.

At Rs 344, the bank trades at Price to book value of 2.2 times FY05 expected numbers. With improvement in almost all of its operational parameters, we believe ICICI Bank is taking the right steps to emerge as one of the most profitable banks in the country. However, in the wake of a rise in interest rates, the spreads on the retail story are likely to come under pressure going forward.

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