The $80-mn exposure to Lehman bonds isn’t large in itself but there could be more to come
That ‘s not reason enough to shave off around $1.5 billion of market capitalisation. It has more to do with the worsening credit environment and a feeling that similar exposures to other banks could turn bad. Had business in the home market been brisk, the market would not have been so worried. But it’s not really been great going for the bank with credit growth tapering off and delinquencies on the rise.
The June 2008 quarter saw the bank post decent numbers: the shift from growth to profitability is paying off in many ways. For instance, the net interest margin improved by 45 basis points to 2.4 per cent and fee income grew by a smart 37 per cent.
But growth will obviously taper off this year and moreover, delinquencies increased by about Rs 200 crore sequentially.
In some ways it’s probably a good thing that the bank is not lending aggressively in today’s challenging credit environment—the consolidated loan book grew by just 20 per cent y-o-y in the June quarter. With a weighted cost of funds that is nearly 200 basis points higher than that of its peers, the bank would find it hard to compete and would end up attracting the worst kind of credit risk.
What ICICI Bank is doing is attempting a structural shift in its resources base by moving away from high cost wholesale deposits to cheaper CASA (current account and savings accounts). That would make it less vulnerable to an increase in funding costs especially in a rising interest rate scenario.
If it can increase the proportion of CASA from the current levels of around 28 per cent, a higher portion of incremental lending would earn better spreads. At the current price of Rs 565, the stock trades at just one time FY09 price to adjusted book value and is cheap. However, it may be a while before the market believes that the worst is over.