ICICI Bank-Signs Of A Slow-Down

ICICI Bank
Life Insurance – First Signs of Slowdown? Getting insured or losing your retirement nest?
ICICI
Prudential has announced that its new business premiums (on APE basis) grew by 40% YoY in the quarter ended March 2008 (F4Q08). Given that the growth rate in Jan–Feb was about 100% YoY, this implies a sharp slowdown in sales in March to about 20% YoY.
If this slowdown were to persist, then in our view, this would have negative implication on valuations being ascribed to life insurance businesses in India and also on fees income, which the private banks were generating from distribution of life insurance policies.
Capital market weakness has caused this slowdown, in our view –
We believe that more than 80% of policies being sold by private insurers in India are unit linked. This implies that investors were potentially looking at life insurance as a way to participate in the bull-run in stock markets.
However, returns clearly disappointed investors in 2008. If we look at average returns generated by various life insurers in 2008, they declined by between 18-30% in F4Q08. This may have caused the slowdown.
India is over-penetrated in life insurance given income and saving levels –
One of the arguments favoring continued growth in life insurance has been that if markets are weak, insurance companies can easily move towards traditional policies – we think it will not be
easy to get growth from traditional policies for the industry, as a whole.
If we look at premium / GDP in India, it is likely to have been above 5% in 2007 – which
is significantly higher than most developing countries. We believe that this over penetration was driven by investors using the insurance route to invest in markets.
If markets remain weak, then we may see continued slowdown in the life insurance business in India.
This slowdown should have implications on valuations –
We are currently building in fairly robust growth in new business in F2009 (around 40-50% across insurance companies) and then applying an 18-20x multiple to value life businesses.
However, if growth continues to remain weak, which is dependent on capital markets activity, then there is clearly significant downside to our valuations.
We believe the companies most at risk are Reliance Capital, ICICI Bank and Kotak Bank.
Fees income will also face adverse headwinds for private banks –
Private Banks were booking a significant amount of fees on distribution of life insurance:
1. Life insurance distribution made up about 5% of total fees for ICICI Bank.
2. Third party distribution (life insurance + mutual funds) contributed 18% of retail commissions for HDFC Bank.
3. We do not have the exact numbers but believe that Axis Bank was booking significant fees on distribution of life insurance products.
If capital markets remain weak, this source of fees income, which was growing in triple digits, will likely slow down.
Hence, weakness in life insurance can impact both earnings and valuations of Indian financials. Given that these stocks are still trading at high multiples, we maintain our Cautious view on the sector.
Performance of Unit Linked Insurance Schemes
NAV 31-Dec-07 30-Mar-08
% Change
ICICI Prudential (Maximiser) 69 56.2 -18%
Bajaj Allianz (Equity Growth) 17.9 13.9 -22%
Reliance Life (Equity) 34.1 24.8 -27%
SBI Life (Equity Fund) 42.6 33.2 -22%
Birla Sunlife (Multiplier) 10.9 8 -27%
Kotak (Aggressive Growth) 39.2 29.7 -24%
HDFC Standard (Growth) 81.3 63.8 -21%
Source: Company data, Morgan Stanley Researc