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ICICI Bank: Cutting all corners - Views on News from Equitymaster
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ICICI Bank: Cutting all corners
Jan 27, 2009

Performance summary
  • Interest income grows by a marginal 3.5% YoY in 9mFY09; advances drop by 1.4% YoY. Net interest margin improves to 2.4% due to higher interest rates on retail portfolio.
  • Operating costs drop with cost to income ratio at 44% in 9mFY09 (51% in 9mFY08).
  • Capital adequacy ratio very healthy at 15.6% in 9mFY09.
  • Gross NPAs higher at 4.1% of advances from 3.0% in 9mFY08; net NPAs at 2.0% (1.5% in 9mFY08).
  • Despite cost curtailment, bottomline remains flat in 9mFY09 (over 9mFY08) due to treasury losses and higher provisioning.


Standalone numbers
Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest income 79,117 78,360 -1.0% 227,590 235,628 3.5%
Interest Expense 59,520 58,456 -1.8% 175,344 173,350 -1.1%
Net Interest Income 19,597 19,904 1.6% 52,246 62,278 19.2%
Net interest margin (%)       2.2% 2.4%  
Other Income 24,265 25,145 3.6% 64,491 59,300 -8.0%
Other Expense 21,276 17,341 -18.5% 60,037 53,880 -10.3%
Provisions and contingencies 7,603 10,077 32.5% 19,571 27,237 39.2%
Profit before tax 14,983 17,631 17.7% 37,129 40,461 9.0%
Tax 2,681 4,909 83.1% 7,050 10,316 46.3%
Profit after tax/ (loss) 12,302 12,722 3.4% 30,079 30,145 0.2%
Net profit margin (%) 15.5% 16.2%   13.2% 12.8%  
No. of shares (m)       899.3 1,113.1  
Book value per share (Rs)*         450.0  
P/BV (x)         0.8  
* Book value as on 31st December 2008

What has driven performance in 3QFY09?
  • In an attempt to avoid raising high deposits to conserve its capital base and prevent additional slippages, ICICI Bank chose to marginally shrink its balance sheet in the nine month period ended December 2008. The liquidity pressure was also due to its inability to withhold domestic customer deposits and limited borrowing ability in the overseas markets. Retail, international and domestic corporate loans comprised 54%, 26% and 12% of the bank’s advances respectively at the end of 9mFY09. Home loans and auto loans comprised 53% and 28% respectively of the retail loan portfolio. Although the bank lost nearly 9% of its deposits during this period, low cost deposits (CASA) continued to comprise 27% of ICICI Bank’s total deposits at the end of 9mFY09. While the bank’s performance in terms of advance growth is lower than our full year estimates, it has performed reasonably well on the profitability front.

    Shrinking balance sheet…
    (Rs m) 9mFY08 % of total 9mFY09 % of total Change
    Advances 2,155,170   2,125,210   -1.4%
    Total deposits 2,297,790   2,090,650   -9.0%
    CASA 624,999 27.2% 572,838 27.4% -8.3%
    Term deposits 1,672,791 72.8% 1,517,812 72.6% -9.3%
    Credit /Deposit 93.8%   101.7%    

  • The risk of slippages in the bank’s asset quality, especially in retail loans has surfaced in the past 9 months as the gross NPAs (non performing assets) in absolute terms has nearly doubled in ICICI Bank’s books. The bank’s net NPAs (as percentage of total advances) increased to 2.0% in 9mFY09, from 1.5% in 9mFY08. The level of incremental delinquencies (slippages in asset quality) has been sequentially increasing every quarter for the past six quarters.

    The consolidated net NPA ratio was 1.7% for ICICI Bank at the end of 9mY09 and the bank stated that 55% of net retail NPA was from unsecured products. The NPA coverage ratio stood at 54%.

  • Fee income (constituting 43% of ICICI Bank’s total income) grew by 10% YoY during 9mFY09. However, despite booking a gain of Rs 9.7 bn in its treasury portfolio in the third quarter, the adverse market conditions during the first half of FY09 had a negative impact on the bank’s trading portfolio; leading to a drop of 8% YoY in other income during 9mFY09.

  • ICICI Bank’s Canada subsidiary posted a profit of Canadian dollar 33 m in 9mFY09 with a CAR of 16.1% (assets of Canadian dollar 6.5 bn). The UK subsidiary had a net profit of US$ 1.4 m and CAR of 18.6% at the end of December 2008 (assets of US$ 7.6 bn). The subsidiaries are therefore sufficiently capitalised for the medium term.

  • While the profits of the housing finance and venture capital subsidiary have nearly doubled, that of the securities and asset management company have dropped by nearly 75% YoY in 9mFY09.

  • 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 (44% in 9mFY09).

What to expect?
At the current price of Rs 364, the stock is trading at a multiple of 0.8 times our estimated FY11 standalone adjusted book value (including ICICI Home Finance). 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 not a matter of serious concern. Having said that, while the long term prospects of the bank appear robust given the higher capital adequacy, strong retail penetration and relationship with the Indian corporates abroad, inability to sustain profitability and asset quality might prove detrimental. We believe that at the current price, the bank offers a high risk - high return proposition for the long term.

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