ICICI Bank -The Slide continues! Please stay away!August 12, 2009 ICICI Bank is now under a new MD Ms Chanda Kochar. She has been on record that in view of the changed environment ICICI Bank will change tack, moderate its persuit of growth and pay more attention to containing risk. Let's look at how things have played out so far. Are the new initiatives working? We will first compare FY09 performance to FY08 and look at the trends showing up. Post that we will look at the latest FY10 June results versus FY09 June Quarter, to get a feel of where things stand! 
Strong Capital BaseA strong capital base is the number one issue to consider before investing in a lenderICICI Bank has its Capital Adequacy ratios at 14.73 percent much above the mandatory 9% requirement stipulated by RBI. However Gross and Net NPA (Non-Performing Assets) have continued to slide down to 3.68 percent and 1.74 percent respectively. This is among the highest in the industry, and the inability to arrest the continuing slide is cause for concern. Return on Equity (RoE) and Return on Assets (RoA)These metrics are the defacto standards for gauging bank profitability.ICICI Bank has shown a drastic falling margins trend, with FY09 consolidated margins standing at a poor 5.58 percent down marginally from a year ago. This is the main reason behind deteriorating RoA and RoE. Return on Equity figures show a dismal 7.57 percent. Compare this with the other leading private sector bank HDFC Bank with RoE at over 16 percent. That tells the story perhaps, of how things have gone wrong with too-aggresive a growth strategy pursued by ICICI Bank. Efficiency RatioThe efficiency ratio measures non-interest expense, or operating costs, as a percentage of income. Basically it tells you how efficiently the bank is managed. Many good banks have efficiency ratios under 55% (lower the better)Cost-efficiency ratios are rising for the last 3 years, and are just under 55% at the moment. Forget the comparisons with other private banks, even PSU State Bank of India has a much better record here than ICICI Bank. Net Interest Margins (NIM)Another simple measure to watch is net interest margin, which looks at net interest income as a percentage of average earning assets. Track margins over time to get a feel for the trend.Net Interest margins have shown some improvement with FY09 NIM standing at 2.4%. You can put this in perspective however when you compare it with HDFC Bank's net interest margins at over 4% for the last few years and the gradually improving trend! Strong RevenuesHistorically many of the best-performing bank investments have been those that have proven capable of above-average revenue growthIt has pared down its aggressive growth strategy. This shows in the 5yr CAGR growth track record of over 44 percent coming down to low single digit growth in FY09. Interest Income has grown by 6% while Fee Income has declined by about 15%. Deposits too have declined by ~5.5% Quarterly Performance! Is that any better?The story so far is probably not that glum. But wait till you review the Quarter on Quarter performance. 1st Qtr FY10 vs 1st Qtr FY09.
Thats a see of red, out there. Lets start with the deposits. The Bank maintains low cost CASA (Current Account and Savings Account) deposits ratio has gone up to 30.4% from 27.6% a year ago. Well that has gone up, not because the bank has managed to attract additional low cost deposits, but because Fixed Deposits have declined by a whopping 14 percent (we know many investors shifting deposits away from ICICI Bank in 2008) with CASA deposits also declining marginally. Naturally CASA deposits as a percentage of Total Deposits ratio has gone up! Fee Income has come down drastically by over 32 percent from year ago levels. Probably this is intentional. But this has been compounded with Interest Income also declining by almost 10 percent from 1st Qtr FY09 levels. Net Interest Income has declined by 5 percent because of a better show on Interest expenses declining by 11 percent. The only positive thing to notice is that Capital Adequacy ratio has gone up to over 17 percent, almost double the mandated 9% rate prescribed by RBI. Net Profit also has increased by over 20%. We can see now that this is primarily because of Treasury Income showing a gain of Rs 714 Cr versus a loss of Rs. 594 Cr a year ago. Treasury Income can be highly volatile! ICICI Bank has much ground to cover before it can stabilise its operations and comfort investors. And miles to go before it can catch up with its peers on margins and profitability metrics. You are well-advised to stay away, till you see a reversal in trends! Especially as its peers have all recorded stellar performances in FY09 as well as this 1st Qtr of FY10.
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