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The marathoner and the sprinter

There is little in common between SBI and ICICI Bank, two of the largest banks in India. One is an old world public sector behemoth, the other a new age private sector giant.

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MUMBAI: There is little in common between State Bank of India and ICICI Bank, two of the largest banks in India. One is an old world public sector behemoth, the other a new age private sector giant.

In the last five years, however, both have been symbols of the economic and banking growth in the country. Now, as they change gears to match the demands of a larger economy, it is worthwhile to compare the two.

Both banks recorded profits in the third quarter of this fiscal, though SBI’s 69.8% surge outshone ICICI’s 35% growth.

ICICI’s profits are being driven mainly by other income - it accounted for 23.5% of the bank’s total income as against 17.4% for SBI.

SBI, the larger of the two, enjoys better current account and savings accounts (CASA) ratio. CASA deposits are cheaper than bulk deposits, which explains why SBI enjoys a better net interest margin (NIM) than ICICI.

NIM is the net interest income (interest earned minus interest expended) expressed as a percentage of average assets.

In Q3, ICICI’s NIM improved by 15 basis points from the September quarter due to better performance on the CASA front. Its CASA improved as it added branches and improved the distribution network.

SBI’s margins increased by 20 bps sequentially due to upward re-pricing of the loan book and reduction in the cost of funds.

While the story so far in terms of profitability seems good, let’s highlight the areas of concern for both the banks and their strategies, going forward.

Over a period of time, ICICI has focused on expanding its retail banking portfolio with fairly successful results. SBI’s profits, though helped by its vast reach, have mainly been corporate driven.

Usually for a bank, an increase in retail presence also brings higher chances of default from retail customers, especially if interest rates are high. If that happens, it leads to accumulation of non-performing assets (NPAs), which could have been the case with ICICI.

ICICI’s net NPAs or bad loans in Q3 rose to 1.5% of advances from 1% in the same period last year, while SBI’s net NPAs dropped to 1.4% from last year’s 1.5%.

Analysts have been flagging ICICI’s NPA status for some time now, particularly after rate hikes by the RBI.

Vaibhav Agarwal, research analyst at Angel Broking, says, “a large part of ICICI’s NPAs comprise unsecured loans, which typically have higher default rates of about 6%. But they also have interest rates between 24-36%”.

ICICI is expanding its international business. Advances in Q3 grew 24.7% y-o-y, driven by a 250% rise in the international loan portfolio. The international business contributes 80% of ICICI’s incremental advances.

Coming to SBI, the much hyped consolidation process (merger of seven associate banks with itself) is taking time. Being state-owned, SBI faces a lot of hitches in getting the consolidation process through quickly.

While State Bank of Saurashtra has approved the merger; employees of the remaining six associates (State Bank of Hyderabad, State Bank of Travancore, State Bank of Mysore, State Bank of Bikaner and Jaipur, State Bank of Patiala and State Bank of Indore) are opposing the merger, fearing job cuts and displacements.

Valuation-wise, most analysts are positive on both stocks. Sejal Doshi, CEO of Finquest Securities, says, “SBI’s stock currently does not factor in all the value unlocking prospects.

Strong branch network, rights issue and the consolidation process augur well for SBI, going forward. On the other hand, ICICI has been an aggressive player and there are strong short term triggers in the form of value unlocking from its subsidiaries.”

Angel Broking’s Agarwal values ICICI stock at Rs1,508 on a sum-of-the-parts valuation basis.

After consolidation, SBI should become strong enough to tackle international competition in 2009, when the banking industry opens for foreign institutions.

Consolidation will strengthen SBI’s balance sheet and take its total branch network to around 14,000. Another important trigger for SBI is its rights issue worth Rs16,736 crore.

The issue will lead to an equity dilution of 16-17%. Analysts maintain that even at an equity dilution of 20%, the risk-return remains positive.

Besides, another opportunity for unlocking value would be the possible listing of its life insurance subsidiary, SBI Life. However, all these measures are subject to government approval which could take months.

ICICI, on the other hand, has no such “approval” headaches. It has also announced plans to list its subsidiary, ICICI Securities, most likely in 2008-09.

The bank plans to deal with higher cost of funding by transferring hold incremental mortgages in the books of its home finance subsidiary (constituted as a non-deposit taking NBFC).

Agarwal says the rationale behind this is to take advantage of NBFC regulations including absence of CRR/ SLR and priority sector requirements, especially given that a large part of the bank’s funding mix comprises of bulk deposits anyway. This should improve the bank’s competitiveness in the home loan segment, giving it leeway to improve margins.

And while ICICI’s rise in such a short span is commendable, it remains to be seen whether the bank can sustain this pace of growth in the long run.

p_pallavi@dnaindia.net

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