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ICICI Bank: Restructured loans surge - Views on News from Equitymaster
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ICICI Bank: Restructured loans surge
Jan 30, 2014

ICICI Bank declared the results for the third quarter and first nine months of financial year 2013-14 (9mFY14). The bank has reported 20% YoY growth in net interest income and 19% YoY growth in net profits for 9mFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 20% in 9mFY14 on the back of 16% YoY growth in advances while net interest margin (NIM) improved to 3.3% from 3.1% in 9mFY13.
  • Cost to income ratio reduces to 38.0% from 40% in 9mFY13.
  • Capital adequacy ratio healthy at 16.8% at the end of December 2013.
  • Net NPAs rise to 0.8% of advances in 9mFY14, from 0.64% in 1HFY13.Restructured loans (up 91% YoY) at 2.6% of advances in December 2013 as against 2.1% in September 2013.
  • Bottomline grows by 19% YoY in 9mFY14 largely due to higher interest margins and cost efficiency.

Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 101,382 114,549 13.0% 297,102 326,889 10.0%
Interest Expense 66,392 71,998 8.4% 196,470 205,698 4.7%
Net Interest Income 34,990 42,551 21.6% 100,632 121,191 20.4%
NIM (%)       3.1% 3.3%  
Other Income 22,146 28,010 26.5% 61,375 74,517 21.4%
Other Expense 22,611 26,170 15.7% 66,055 74,297 12.5%
Provisions and contingencies 3,687 6,946 88.4% 13,425 19,126 42.5%
Profit before tax 30,838 37,445 21.4% 82,527 102,285 23.9%
Tax 8,335 12,121 45.4% 22,311 30,699 37.6%
Profit after tax / (loss) 22,503 25,324 12.5% 60,216 71,586 18.9%
Net profit margin (%) 22.2% 22.1%   20.3% 21.9%  
No. of shares (m)         1,154.5  
Book value per share (Rs)*         641.0  
P/BV (x)         1.5  
* (Standalone book value as on 31st December 2013)

What has driven performance in 9mFY14?
  • Clearly showing the signs of stress in asset quality, the performance of ICICI Bank was dogged by both - the sluggish pace of growth in credit in Indian banking and rise in slippages. The improved CASA proportion however came handy and helped the bank improve its net interest margins at a time when most other are feeling the pressure of higher cost. The bank's NIMs at 3.3% at the end of December quarter is higher than 3.1% in 3QFY13. It has also managed to retain margins at the same level for the past 5 quarters. In terms of loan growth and deposit growth, ICICI Bank's numbers have come in line with the growth rate posted by most of its private sector peers.

    On the assets side, ICICI Bank has kept the proportion of corporate advances in check and reduced the SME exposure. However most of the incremental lending was to the retail segment. The upside in margins (NIMs) may be capped with a possibility of rise in interest costs.

    Loan growth focus shifts from corporate to retail
      9mFY13 % of total 9mFY14 % of total Change
    Advances 2,868,000   3,326,000   16.0%
    Retail 1,000,932 34.9% 1,220,642 36.7% 22.0%
    Corporate 980,856 34.2% 1,047,690 31.5% 6.8%
    SME 149,136 5.2% 143,018 4.3% -4.1%
    International 737,076 25.7% 914,650 27.5% 24.1%
    Deposits 2,864,180   3,169,700   10.7%
    CASA 1,171,370 40.9% 1,371,660 43.3% 17.1%
    Term deposits 1,692,810 59.1% 1,798,040 56.7% 6.2%

  • The bank had 0.6% of its investments in security receipts of asset reconstruction companies and credit derivative exposure (on and off balance sheet) at the end of December 2013.

  • The gross NPAs (non performing assets) in absolute terms have gone up by just 6% over the past 12 months. However the steep rise in restructured loans signal possibility of spike in gross NPAs going forward. Net NPAs rose to 0.8% of advances in 9mFY14, from 0.64% in 1HFY13. The restructured loans (up 91% YoY) were at 2.6% of advances in December 2013 as against 2.1% in September 2013. The NPAs in retail loan portfolio stood at 3.6% of advances. The NPA coverage ratio stood at 70%. Going forward, the bank remains vulnerable to NPA risks emanating from its exposure to the power sector, particularly SEBs (state electricity boards).

  • Fee income constituted 37.9% of ICICI Bank's total income in 9mFY14 as against 40.7% in 9mFY13. In 2QFY14, ICICI Bank fully recognized the mark-to-market provisions of Rs 2.8 bn on its investment portfolio. Also the bank transferred SLR securities to the tune of Rs 23 bn from AFS and HFT category to HTM category, thereby taking write down of Rs 100 m on account of the movement of bond yields.

  • Lower the direct marketing costs helped ICICI Bank bring down the cost to income ratio to 38% in 1HFY14 from 40% in 9mFY13.
What to expect?
At the current price of Rs 973, the stock is trading at a multiple of 1.2 times our estimated FY16 consolidated adjusted book value (excluding insurance businesses). The bank's performance has been in line with our estimates with regard to loan growth and margins. However the slippage in asset quality remains under review. While growth will continue at a muted pace in the near term, ICICI Bank is well capitalized to take advantage of lending opportunities as and when the economy picks up.

Worth noting that we value ICICI Bank at a relative discount to private sector peers due the bank's past history of risky operations and managerial decision making. Hence despite the attractive valuations, we recommend investors to not buy the stock at current levels and reiterate our 'hold view' on the stock.

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