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ICICI Bank: Coming of age! - Views on News from Equitymaster
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ICICI Bank: Coming of age!
Jan 20, 2006

Performance Summary
ICICI Bank has declared results for the third quarter ended December 2005. The bank has registered a commendable performance across the board. What is, however, more appreciable is that besides continuing to outperform the sector in terms of asset growth, the bank has also managed to grow its deposit book and fee income in tandem with it. While the NPA levels have got further diluted the margin pressures also seems to be finally coming off.

Rs (m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Income from operations 23,784 35,836 50.7% 68,046 97,947 43.9%
Other Income 8,907 11,792 32.4% 23,838 33,812 41.8%
Interest Expense 16,452 24,168 46.9% 47,557 68,232 43.5%
Net Interest Income 7,332 11,668 59.1% 20,489 29,715 45.0%
Operating profit margin -5.0% 0.4%   -4.5% -1.8%  
Other Expense 8,526 11,514 35.0% 23,539 31,433 33.5%
Provisions and contingencies 1,082 3,951 265.2% 3,487 9,967 185.8%
Profit before tax 6,631 7,995 20.6% 17,301 22,127 27.9%
Tax 1,453 1,595 9.8% 3,396 4,626 36.2%
Profit after tax/ (loss) 5,178 6,400 23.6% 13,905 17,501 25.9%
Net profit margin (%) 14.4% 26.9%   20.4% 17.9%  
No. of shares (m)       735.9 875.1  
Diluted earnings per share (Rs)*         27.0  
P/E (x)         21.5  
* (12 months trailing)            

Encashing retail
ICICI Bank, in terms of asset size, is the second largest bank in the country after SBI. At the end of 3QFY06, the bank had a franchise of over 1,790 ATMs and 601 branches spread across the country. Retail assets constituted 64% of advances in the quarter. The bank is focusing on loan origination in the retail and agriculture segments and on non-fund based products and services, as well as capitalising on opportunities presented by the domestic and international expansion of Indian companies.

What has driven performance in 3QFY06?
Of advances and more: ICICI Bank continued to clock over 50% growth in its advance book for the fourth consecutive quarter in 3QFY06. While it is needless to mention that the bank’s retail segment (70% YoY growth) continues to spearhead this growth, the corporate segment (44% YoY growth) is also trying to catch up. What is most interesting to note is that while liquidity constraints are hampering credit growth across the sector, ICICI Bank has managed to grow its deposit book also by 63% YoY. The marginal fall in the incremental credit deposit ratio, nevertheless, could be comprehended as being indicative of early signs of slowdown in credit growth. While the bank has not divulged any details regarding it cost of funds and net interest margins (NIMs), we envisage an improvement in the NIMs due to replacement of the erstwhile ICICI borrowings. At the end of 9mFY06, the bank had the largest retail credit portfolio amongst domestic banks with the highest market share across segments. Housing loans comprised 22% of the bank’s total disbursements during 9mFY06.

Credit deposit ratio…signs of slowdown?
(Rs m) 3QFY05 % of total 3QFY06 % of total Change
Advances 769,611   1,226,484   59.4%
Retail 461,940 60.0% 784,950 64.0% 69.9%
Corporate 307,671 40.0% 441,534 36.0% 43.5%
Deposits 819,280   1,338,810   63.4%
Credit deposit ratio 93.9%   91.6%    

Fee growth-no stopping: Fee income (constituting 83% of non fund income) has continued to witness unabated growth (52% YoY in 3QFY06) from the bank’s retail and international operations alike. The bank has clarified that while 60% of the fee income is derived from its domestic retail operations, 10% is derived from international operations and remaining 20% is garnered from the domestic corporate customers. It must also be noted that the bank stands well hedged in terms of its treasury portfolio of which 85% is in the HTM (held to maturity) basket besides having lower duration of investments in the AFS (available for sale) category (which needs to be marked to market).

Quality-NPAs unloaded: It may be recalled that the resolution of the Dabhol project had led to ICICI Bank selling the underlying collateral and recovering a substantial proportion of NPAs in the second quarter of FY06. Thus the net NPA to advances ratio of the bank contracted to 1% from 2.6% in 2QFY06. In 3QFY06, the bank has further offloaded its stressed assets by selling the NPAs through the first auction of non-performing assets in India, the same having been approved by the RBI. This further pared the bank’s net NPA levels to 0.8% in 3QFY06.

Costs-dampening margins: While the trend of rising costs due to wider franchise is seen across players in the private sector banking space, ICICI Bank has been leading the same. The bank is almost on the verge of catching up with PSU banking behemoth SBI in terms of its cost to income ratio. The same beckons caution as lower operating efficiency may dampen margins in the longer term.

Capital comfort: The bank had a successful Rs 80 bn follow-on public issue (inclusive of a 15% green shoe option) in 3QFY06, 73% of which was listed on the domestic bourses and the rest being in the form of ADRs. With this, the bank’s CAR (capital adequacy ratio) has improved to 15% in 3QFY06, as against 14% in 3QFY05. The additional capital positions the bank very comfortably in terms of ability of retain its credit growth.

What to expect?
ICICI Bank has continued to deliver as per expectations in terms of credit growth and asset quality. The bank, given its well distributed franchise and technical superiority also stands to gain in terms of fee income growth. The margin pressure, which is envisaged across the banking sector, may not visibly impact ICICI Bank’s NIMs due to the re-pricing of its funds. Also, given the comfortable CAR position, we see the bank continuing to outperform the sector in terms of asset growth.

At the current price of Rs 580, the stock is trading at 2.2 times our estimated FY08 adjusted book value, which makes it skewed towards risks on the risk return matrix. Although its insurance subsidiaries continue to pare the consolidated valuations of the bank, we see the sum of parts valuations filtering in, in the longer term.

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