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ICICI Bank: Still wary of lending
Jan 21, 2010

Performance summary
  • Interest income falls by 16% YoY in 9mFY10; advances drop by 16% YoY. Net interest margin (NIM) improves to 2.6% due to higher CASA proportion.
  • Operating costs drop with cost to income ratio at 37% in 9mFY10 (44% in 9mFY09).
  • Capital adequacy ratio healthy at 19.4% in 9mFY10 (as per Basel II).
  • Net NPAs remain at 2.2% of advances in 9mFY10.
  • Bottomline remains flat over 9mFY09, despite lower fees and higher provisioning, due to cost curtailment.


Standalone numbers
Rs (m) 3QFY08 3QFY10 Change 9mFY09 9mFY10 Change
Interest income 78,360 60,895 -22.3% 235,628 198,799 -15.6%
Interest Expense 58,456 40,315 -31.0% 173,351 138,005 -20.4%
Net Interest Income 19,904 20,580 3.4% 62,277 60,794 -2.4%
Net interest margin (%)       2.4% 2.6%  
Other Income 25,145 16,731 -33.5% 59,300 55,868 -5.8%
Other Expense 17,341 13,624 -21.4% 53,880 43,329 -19.6%
Provisions and contingencies 10,077 10,022 -0.5% 27,237 33,971 24.7%
Profit before tax 17,631 13,665 -22.5% 40,460 39,362 -2.7%
Tax 4,909 2,656 -45.9% 10,317 9,167 -11.1%
Profit after tax/ (loss) 12,722 11,009 -13.5% 30,143 30,195 0.2%
Net profit margin (%) 16.2% 18.1%   12.8% 15.2%  
No. of shares (m)       1,113.3 1,114.2  
Book value per share (Rs)*         468.9  
P/BV (x)         1.8  
* Book value as on 31st December 2009

What has driven performance in 9mFY10?
  • Continuing to cut down its balance sheet size, ICICI Bank reduced the size of its loan book by 16% YoY in 9mFY10. This was backed by 6% YoY fall in the deposit base as well. While ICICI Bank attributed the fall in advances to repayments by retail and international customers, the bank's unwillingness to incremental lending was also evident. On the liabilities side, it concentrated on CASA (low cost) deposits which grew to 37% of the bank's total deposits in 9mFY10 from 27% in 9mFY09.

    Thanks to the eased liquidity scenario, ICICI Bank managed to do away with high cost domestic customer deposits and limited its overseas borrowings in the past two quarters. Also ICICI Bank continued its attempt to avoid incremental delinquencies and conserve capital. As a result, despite a very comfortable capital adequacy ratio, the bank has refrained from growing its asset book. Higher CASA proportion helped improve the bank’s NIMs from 2.4% in 9mFY09 to 2.6% in 9mFY10. While the bank’s balance sheet de-growth so far has been lower than our estimates (-ve 6% for full year FY10), it is well on track to achieve our profit growth estimates.

    Risk averse structuring…
    (Rs m) 9mFY09 % of total 9mFY10 % of total Change
    Advances 2,125,210   1,792,690   -15.6%
    Retail 1,260,250 59.3% 806,711 45.0% -36.0%
    Corporate 286,903 13.5% 448,173 25.0% 56.2%
    Rural 155,140 7.3% 107,561 6.0% -30.7%
    SME 42,504 2.0% 71,708 4.0% 68.7%
    International 380,413 11.3% 358,538 20.0% -5.8%
               
    Total deposits 2,090,650   1,976,530   -5.5%
    CASA 572,838 27.4% 782,706 39.6% 36.6%
    Term deposits 1,517,812 72.6% 1,193,824 60.4% -21.3%
    Credit /Deposit 101.7%   90.7%    

  • The gross NPAs (non performing assets) in absolute terms have nearly doubled in ICICI Bank’s books in the past 12 months. The bank’s net NPAs (as percentage of total advances) increased to 2.2% in 9mFY10, from 2% in 9mFY09. The level of incremental delinquencies (slippages in asset quality) has been sequentially increasing every quarter for the past eight quarters.

    The bank stated that 55% of net retail NPA was from unsecured products. The NPA coverage ratio stood at 60%.

  • Fee income constituted 35% of ICICI Bank’s total income in 9mFY10 as against 47% in 9mFY09. The 6% YoY fall in other income was primarily due to lower fees as well as lower treasury income and dividend from subsidiaries.

  • The bank has received licenses to set up additional 580 branches over the next few quarters. Although ICICI Bank has halved the direct marketing costs, the cost of operating the incremental branches may increase the cost to income ratio from the current levels (37% in 9mFY10).

What to expect?
At the current price of Rs 848, the stock is trading at a multiple of 1.9 times our estimated FY12 standalone adjusted book value (including ICICI Home Finance). While it is encouraging to note that ICICI Bank is getting very candid about the disclosures of off-balance sheet items and exposures to international assets, the potential risks to the same cannot be sidelined. Given the size of ICICI Bank’s balance sheet, its conscious strategy of withholding any further growth in the same for a couple of quarters is, however, not a matter of serious concern. Having said that, we may have to revise our balance sheet estimates for the bank. Nevertheless, the current valuations of the bank leave very little on the table for investors.

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