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ICICI Bank: Fading quality - Views on News from Equitymaster

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ICICI Bank: Fading quality
Jan 21, 2008

Performance summary
  • Interest income grows by 41% YoY in 3QFY08 on the back of 25% YoY growth in advances.

  • Operating costs remain stable with cost to income ratio at 49%.

  • Net interest margin improves to 2.3% due to doubling of (low-cost) overseas borrowing.

  • Capital adequacy ratio comfortable at 15.8% post capital raising in 2QFY08.

  • Net NPAs higher at 1.5% of advances from 1.3% in 2QFY08 and 1.0% in 3QFY07.

  • Bottomline grows by 35% YoY despite higher tax outgo; growth aided by higher fee income.

    Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Interest income 56,008 79,117 41.3% 155,996 227,590 45.9%
    Interest Expense 41,158 59,520 44.6% 115,716 175,344 51.5%
    Net Interest Income 14,850 19,597 32.0% 40,280 52,246 29.7%
    Net interest margin (%)       2.2% 2.3%  
    Other Income 19,805 24,265 22.5% 48,282 64,491 33.6%
    Other Expense 17,132 21,276 24.2% 47,699 60,037 25.9%
    Provisions and contingencies 6,671 7,603 14.0% 13,500 19,571 45.0%
    Profit before tax 10,852 14,983 38.1% 27,363 37,129 35.7%
    Tax 1,751 2,681 53.1% 4,512 7,050 56.3%
    Profit after tax/ (loss) 9,101 12,302 35.2% 22,851 30,079 31.6%
    Net profit margin (%) 16.2% 15.5%   14.6% 13.2%  
    No. of shares (m) 894.0 1,112.2   894.0 1,112.2  
    Book value per share (Rs)*         418.2  
    P/BV (x)         3.0  
    * Book value as on 31st December 2007

    What has driven performance in 3QFY08?
    • International business outshines domestic: Although retaining its market share across loan categories, ICICI Bank, in line with the sector, moderated its asset growth pace and clocked advance growth of 25% YoY in 9mFY08 against 41% YoY in 9mFY07. Further, while retail assets continued to enjoy dominance in the bank’s portfolio allocation (61% in 9mFY08), it was largely the bank’s SME and international assets that grew at a faster pace. On the other hand, the bank chose to pare some assets in the low yielding corporate portfolio. Although the size of the retail segment continues to help ICICI Bank in retaining the distinction of having the largest retail asset base in India, the bank clearly seems to have shifted its focus overseas not just in terms of lending but also borrowing. Overseas borrowings comprised 23% of the total deposits and borrowings of the bank at the end of 9mFY08 (8.8% at the end of 9mFY07). This also helped the bank marginally improve its NIMs to 2.3% (2.2% in 9mFY07), as international funds are sourced at relatively lower costs than domestic funds.

      Overseas opportunity beckons…
      (Rs m) 9mFY07 % of total 9mFY08 % of total Change
      Advances 1,727,630   2,155,170   24.7%
      Retail 1,172,420 61.3% 1,313,110 60.9% 12.0%
      Corporate 197,766 18.5% 196,064 9.1% -0.9%
      Rural 113,680 7.3% 141,360 6.6% 24.3%
      SME 33,260 1.8% 52,050 2.4% 56.5%
      International 210,505 11.1% 452,586 21.0% 115.0%
      Deposits 1,968,930   2,297,790   16.7%
      CASA 470,620 23.9% 624,940 27.2% 32.8%
      Term deposits 1,498,310 76.1% 1,672,850 72.8% 11.6%
      Credit /Deposit 87.7%   93.8%    

    • ‘Absolute’ slippages: The pressure of undercutting its peers by offering very competitive interest rates, especially in retail loans seems to have shown its colours as the gross NPAs in absolute terms has nearly doubled in ICICI Bank’s books. ICICI Bank’s net NPAs (as percentage of total advances) increased to 1.5% in 9mFY08, from 1.0% in 9mFY07. The level of incremental delinquencies (slippages in asset quality) has been sequentially increasing every quarter for the past four quarters. Also, the bank clarified that 54% of the NPAs were from non-collateralised assets such as personal loans and credit cards. Retail NPAs were 64% of the bank’s gross NPAs in 9mFY08. Net NPAs in the retail book were to the tune of 2.5% (1.5% in 9mFY07).

    • Fee growth aids profitability: Fee income (constituting 40.7% of ICICI Bank’s total income) grew by a robust 33% YoY during 9mFY08. Of this, 55% was derived from retail assets while the remaining 45% was from corporate and international assets. The reason for the fall in fee to total income proportion (41.2% in 9mFY07) can be attributed to the increased share of interest income from the overseas branches. International business comprised 22% of the bank’s consolidated banking assets in 1HFY08.

    • Capital comfort: ICICI Bank undertook a capital raising exercise of about Rs 200 bn (US$ 4.9 bn) through a simultaneous public issue in India and issue of American Depositary Shares (ADS). The issue entailed a dilution of 27% of the capital base and improved its CAR to 15.8% in 9mFY08. However, this has diluted the bank’s return on net worth (RONW) to 11.4%, from 13% in 9mFY07. Going forward, the bank plans to leverage its equity book for funding its expansion plans.

    • Subsidiaries: The life and non-life insurance businesses retained market share of 11.8% and 31% respectively. The life insurance business had a NBAP margin of 19.3% while the general insurance business grew its profits by 134% (on a very small base) in 9mFY08.

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