ICICI Bank - Too Risky, better left alone
You may also like to see ICICI Bank FY09 & 1QFY10 update March 12, 2009 ICICI Bank stock price has seen constant declines since middle of 2008. Recent hammering of the stock has taken the share price below its Book Value. Let's examaine if there are some good resons for the drastic declines. 
Want to collaborate with me and contribute towards India Stock Analysis? 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 13.46 percent much above the mandatory 9% requirement stipulated by RBI. However Gross and Net NPA (Non-Performing Assets) at 3 percent and 1.39 percent is among the highest in the industry, which is a cause for concern. Return on Equity (RoE) and Return on Assets (RoA)These metrics are the defacto standards for gauging bank profitability. Generally investors should look for mid to high-teen returns on equity. It is easy to boost bank's earnings in the short term by under-provisioning or leveraging up the balance sheet, which can be unduly risky over the long term. For this reason, it is good to see a high level of return on assets as well. For Banks a top RoA is in the 1.2 to 1.4 percent rangeICICI Bank has shown a drastic falling margins trend, with FY08 consolidated net margins standing at a poor 5.2 percent down from about 6.4 percent a year ago. This is the main reason behind deteriorating RoA and RoE ratios. Return on Equity figures show a dismal 7.63 percent and RoA too is poor at 0.71 percent. Compare this with the other leading private sector bank HDFC Bank with RoE at over 16 percent and RoA at 1.42 percent. To be fair though, ICICI has had consistently higher Asset Turnover ratios than State Bank of India, Axis Bank and even HDFC Bank - but that obviously cannot compensate for the abysmal net margin levels. This tells the story perhaps, of how things have gone wrong with the aggresive growth strategy pursued by ICICI Group. Efficiency RatioThe efficiency ratio or cost to income 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)It has been generally maintaining cost-efficiency ratios at just over 50 percent, which is okay. 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 are also showing a gradual declining trend with FY08 NIM standing at 2.22%. You can put this in perspective when you compare it with Strong RevenuesHistorically many of the best-performing bank investments have been those that have proven capable of above-average revenue growthICICI Bank (Group) has pursued growth aggressively and this shows in the overall growth track record of over 44 percent CAGR over 5 years. Interest Income and Fee Income have grown apace at around 40%. However this has come at a cost - declining margins and a severe squeeze on profitability. Price to BookBecause a bank’s balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock. Also many of the assets included in their book value are marked-to-market –in other words they are revalued every quarter to reflect shifts in the marketplace, which means that book value is reasonably current. So the base value for a bank should be the book value. Any premium over that, investors are paying for future growth and excess earnings. Typically big reputed banks trade at 2x to 4x book value.ICICI Bank is currently (Mar 12, 2009) trading at less than Book Value, historically at its lowest levels in the last 5 years. Similarly on a price-to-earnings measure too it is quoting at 7x TTM earnings, again historically the lowest levels in 5 years. However the above data makes it clear that the stock is best left alone; we now know there are good reasons why the stock has been so badly hammered. Overall verdictUnworthy of further investigation. Too Risky - better left alone. If interested in Private Bank stocks in the Indian stock market, its time to get to
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