Tuesday, April 27, 2010


After seven consecutive quarters of contraction in its loan book, ICICI Bank is now looking to grow its domestic loan book by 20% in FY11. The bank has already made credible progress towards increasing CASA and stabilising asset quality. We expect the bank’s loans to grow at sub-industry rate in FY11, with no material NIM expansion. Provision charges are likely to remain high to meet RBI’s required 70% NPL coverage by 2QFY11. We expect the RoE to remain in single digits until FY12, and view the stock as expensive on PE and PEG basis. We retain REDUCE.

New retail strategy needs time: In contrast to its earlier strategy of discouraging branch-banking and aggressively acquiring new customers through direct-marketing agents (DMAs) and call centres, the bank is now focussing on cross-selling to existing customers. We believe this change in stance will take some time to trickle down to customers. Unlike in the past, the bank is unlikely to be a price leader, as it has more competition from government banks and has fewer products to offer, having reduced its focus on credit-card and unsecured personal loans.

Material NIM expansion unlikely: While the CASA ratio has risen by 12pps to 40% over the past year, NIMs have expanded by only 20bps over the same period. The growing proportion of overseas loans, coupled with the bank’s exit from high-yielding retail loans, has effectively capped NIM expansion. We expect these factors to continue to play out over FY11 as the proportion of overseas loans remains high and the bank concentrates on secured retail lending.

NPLs have peaked, but credit charges may not decline: Gross NPLs have declined by 10% and gross retail NPLs by 16%, since peaking in 4QFY09. However, the NPL coverage ratio of 51% (62%, considering technical write-offs, which are yet to be approved by RBI) remain well below the minimum 70% stipulated by RBI. As such, we expect provision charges to remain high.

To read the full report: ICICI BANK