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ICICI Bank: ‘Advancing’ ahead! - Views on News from Equitymaster
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ICICI Bank: ‘Advancing’ ahead!
Jan 22, 2007

Performance summary
ICICI Bank reported strong results for the quarter and nine-month period ended December 2006. The robustness in performance has been on the back of strong growth in advances and buoyancy in fee income. Strong numbers from the rural and international fronts has also aided the overall performance during the said periods. Decline in net interest margins (NIMs) and higher provisions have, however, impacted the bottomline growth, which has underperformed growth in topline during 9mFY07.

Rs (m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Income from operations 37,125 58,247 56.9% 101,578 163,327 60.8%
Other Income 11,792 19,806 68.0% 33,812 48,283 42.8%
Interest Expense 24,169 41,159 70.3% 68,232 115,716 69.6%
Net Interest Income 12,956 17,088 31.9% 33,346 47,611 42.8%
Net interest margin (%)   2.6%   2.8% 2.5%  
Other Expense 12,803 17,133 33.8% 35,065 47,700 36.0%
Provisions and contingencies 3,951 8,910 125.5% 9,967 20,831 109.0%
Profit before tax 7,994 10,852 35.7% 22,126 27,363 23.7%
Tax 1,593 1,751 9.9% 4,625 4,512 -2.4%
Profit after tax/ (loss) 6,401 9,101 42.2% 17,501 22,851 30.6%
Net profit margin (%) 17.2% 15.6%   17.2% 14.0%  
No. of shares (m)       875.1 894.0  
Diluted earnings per share (Rs)*         34.4  
P/E (x)*         28.3  
* On a trailing 12-month basis

Company background
ICICI Bank, in terms of asset size, is the second largest bank in the country after SBI. At the end of December 2006, the bank had a franchise of over 2,681 ATMs and 667 branches spread across the country. Retail assets constituted 68% of advances in 9mFY07. 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 9mFY07?
Buoyancy in advances continue: It was an all-round show from ICICI Bank during the nine-month period, which saw its advances grow by a strong 41% YoY. Out of this, while retail advances (68% of total advances) witnessed growth of 50% YoY, corporate advances romped home with a 24% YoY growth. This growth was duly aided by the bank’s initiatives in the rural and international markets. While the rural portfolio grew by 43% YoY, total advances of the bank’s international branches, levered by the bank’s Indian corporate clientele overseas, reported a growth of 60% YoY. The 50% YoY growth in retail segment continues to help the bank in retaining the distinction of having the largest retail asset base in India. We believe that the bank’s focus on non-fund based products and services, as well as capitalising on opportunities presented by the domestic and international expansion of Indian companies seems to be paying off, as witnessed in the strong growth in advances during the said period.

Also, ICICI Bank has continued to enjoy the benefits of shedding off the erstwhile ICICI’s high cost borrowings (comprising 19% of total borrowings at the end of December 2006 against 32% in December 2005). On the deposits front, during 9mFY07, the bank witnessed a growth of 47% YoY in its deposit base against the average industry growth rate of just over 20%. The quarter saw the bank adding 35 branches and 345 ATMs, thus taking the number of branches and extension counters to 667 and ATMs to 2,681.

The bank’s net NPAs (as percentage of total net advances) increased to 1%, from 0.8% and 0.9% in December 2005 and September 2006 respectively. This was seemingly a result of incremental delinquencies (slippages in asset quality) in the retail portfolio. Importantly, despite the consistent rise in net NPAs over the past few quarters, the provisioning cover has continued to decline, which calls for additional risk mitigation.

  9mFY06 % of total 9mFY07 % of total Change
Advances 1,226,129   1,727,631   40.9%
Retail 784,950 64.0% 1,179,140 68.3% 50.2%
Corporate 441,179 36.0% 548,491 31.7% 24.3%
Investments 571,800   795,330   39.1%
Deposits 1,338,815   1,968,928   47.1%
Borrowings 438,070   588,190   34.3%
ICICI borrowings 141,170 32.2% 111,900 19.0% -20.7%
Other borrowings 296,900 67.8% 476,290 81.0% 60.4%
Credit /Deposit 91.6%   87.7%    

Fee growth aids profitability: Fee income (constituting 39.8% of ICICI Bank’s total income) grew by a robust 53% YoY during 3QFY07 (53% YoY in 9mFY07 as well). In fact, this has been a significant contributor to the bank’s profitability over the past few quarters and considering that, in the future, the bank is expected to successfully leverage its corporate client base overseas, it may well be able to sustain this strong growth rate in the future as well. We must reiterate 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 investments in the AFS (available for sale) category (which needs to be marked to market).

Gearing for Basel II: ICICI Bank’s CAR (capital adequacy ratio) at 13.4% by the end of December 2006 is well above the RBI requirement of 9%. However, on the back of robust credit growth, the same declined sequentially, from 14.3% at the end of September 2006. Towards shoring up the same as also to meet up the expected growth in credit, the bank had recently issued bonds internationally to the tune of US$ 2 bn, the largest by any Indian bank. About 58% of the notes were sold into the US while Asia and Europe contributed for about 21% each.

What to expect?
At the current price of Rs 975, the stock is trading at 3.2 times our estimated FY09 adjusted book value. Our concerns with respect to ICICI Bank’s increasing delinquencies and pressure on margins were vindicated yet again in 3QFY07. Also, while the medium term prospects of the bank appear robust given the higher capital adequacy, strong retail penetration and relationship with the Indian corporates abroad, we see most of these already having been factored into its stock price. This calls for high degree of caution with respect to investment in the stock.

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