Eye See Eye See Eye: Financial Express: 21st October 2008

Traditionally, all banks tend to have imposing building structures because they have to give the impression of stability and reassurance to all their customers. Deposit holders in particular need to be told that their money is in safe hands. The most awe-inspiring building is the one built by ICICI Bank in Bandra Kurla Complex which is symbolic of size, dynamism and innovation.
The malicious campaign against ICICI Bank perhaps had roots in the bank’s success; a case of sour grapes. ICICI’s global forays were aggressive and accolades were won when the conquests were made. But this was turned into a fear factor by those talking about risks. The best thing is, of course, to always look at the numbers.
Quite coincidentally, RBI recently brought out data on banks. ICICI has witnessed a growth of 260% in its deposits and credit in the last four years. With a credit-deposit ratio of 92% (SBI peaked at 78% in FY08), it clearly shows the calibre of a leader. However, its cost of funds has increased from 3.02% in FY05 to 6.4% in FY08. Contrast this with SBI which has seen an increase from 4.9% to 5.64% during the same period. Quite clearly, the deposit garnering act has been at a higher cost.
On the earnings side, the adjusted return on advances (after adjusting for cost of funds) has fallen almost continuously from 6.94% in FY04 to 4.08% in FY07 before rising to 4.33% in FY08. Higher cost of funds (deposit) combined with lower returns does raise questions. One often quoted instance of aggressiveness is in the cards business where the Bank has one of the largest number of card holders—however, these cards are distributed quite freely outside Food Bazaar outlets or any other department store. This could be a source of concern as delinquencies can be high here if proper due diligence is not done. Again in contrast, the SBI’s return on advances actually rose from 1.88% in FY04 to 3.70% in FY08.
These numbers would not otherwise have been too significant but for the fact that the NPA ratio has also been on the rise. In fact, the Bank had prudently brought down this level post becoming a universal bank in 2003, from 2.21% to 0.72% in FY06. However, it has risen in the last 2 years to 1.55%. In contrast, the NPAs of SBI had come down from 3.48% in FY04 to 1.56% in FY07 before rising to 1.78% in FY08. ICICI Bank is well capitalised which is comforting as the ratio has risen to 13.97%, one of the highest in the industry. However, the fact that it has been raising capital in the past means that with this kind of financials, it may be difficult to do so more frequently. Its capital (equity plus reserves) has gone up from Rs 8,360 cr to Rs 46,820 cr during this period, while SBI was able to add only Rs 28,802 cr essentially through profit plough-back.
The other question raised about ICICI, and about banks in general, is their participation in financial ‘innovation’. Indian private banks and some public sector banks do have positions in off-balance sheet items that come under the heading of contingent liabilities. These business lines offer fee income without any accompanying deployment of resources and are therefore attractive. In case of ICICI Bank, the ratio of contingent liabilities to total assets was 2.87, while it was 4.45 for HDFC Bank and 2.36 for AXIS Bank. The same was 1.12 for SBI and 0.47 for Bank of Baroda. Everyone is taking a closer look at these business lines that provide a lot of ‘other income’ to banks and come under the scanner only under these unusual circumstances.
But the key question is: was there any reason for the layman, or deposit holder, to have got worried? The answer is obviously no because ICICI is very well capitalised and solid in terms of its functioning and losses if any can easily be absorbed. The fact that profits earned are over Rs 4,000 cr and that it has paid a dividend rate of over 100% this year are firm pointers of good performance and safety.