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ICICI Bank: Net interest margins gather steam - Views on News from Equitymaster

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ICICI Bank: Net interest margins gather steam
Jan 31, 2013

ICICI Bank declared the results for the third quarter and first nine months of financial year 2012-2013 (9mFY13). The bank has reported 32% YoY growth in both net interest income and net profits for the first nine months. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 32% in 9mFY13 on the back of 17% YoY in advances while net interest margin (NIM) improved to 3.0% from 2.6% in 9mFY12.
  • Cost to income ratio reduces to 41% from 44% in 9mFY12.
  • Capital adequacy ratio healthy at 19.5% at the end of December 2012.
  • Net NPAs at 0.64% of advances in 9mFY13 as against 0.7% in 9mFY12.
  • Bottomline grows by 32% YoY in 9mFY13 largely due to higher interest margins and cost efficiency. This is despite increase in provisioning which enhanced coverage ratio to 78% in December 2012.
  • Restructured assets were 1.5% of loan book in 9mFY13.

Standalone financial performance
Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Interest income 85,918 101,382 18.0% 243,680 297,102 21.9%
Interest Expense 58,798 66,392 12.9% 167,386 196,470 17.4%
Net Interest Income 27,120 34,990 29.0% 76,294 100,632 31.9%
NIM (%)       2.6% 3.0%  
Other Income 18,918 22,146 17.1% 52,743 61,375 16.4%
Other Expense 19,167 22,611 18.0% 56,288 66,055 17.4%
Provisions and contingencies 3,411 3,687 8.1% 11,137 13,425 20.5%
Profit before tax 23,460 30,838 31.4% 61,612 82,527 33.9%
Tax 6,179 8,335 34.9% 15,976 22,311 39.7%
Profit after tax / (loss) 17,281 22,503 30.2% 45,636 60,216 31.9%
Net profit margin (%) 20.1% 22.2%   18.7% 20.3%  
No. of shares (m)         1,153.1  
Book value per share (Rs)*         598.0  
P/BV (x)         2.0  
* (Book value as on 31st December 2012)

What has driven performance in 9mFY13?
  • Voluntarily, if not by compulsion, ICICI Bank chose to keep its balance sheet expansion muted in 9mFY13. The motive seems to be both capital conservation as well check on asset quality. Both in terms of loan growth and deposit growth, ICICI Bank's numbers have come in a tad lower than the growth rate posted by most of its private sector peers. However, given the bank's balance sheet size the cautious undertone has certainly paid off by way of better and more stable net interest margins. The bank's NIMs at 3% at the end of December quarter is not just higher than 2.6% in 9mFY12. It has also managed to retain margins at the same level for the past 4 quarters. Thus, ICICI Bank has displayed ample resilience to the economic downturn over the past few quarters.

    While keeping its incremental exposure to retail loans limited, ICICI Bank's loan growth was pretty much in line with the sector average and marginally higher than our estimates. Although, ICICI Bank seems to have kept a close eye on CASA deposits, the proportion of the same remained flattish. The bank's deposits grew by 9.9% YoY in 9mFY13, while there was 15% YoY growth in the term deposit base.

    On the assets side, ICICI Bank has kept the proportion of retail advances in check. However most of the incremental lending was to the mid and large corporate segment. This ensured that the bank kept its net interest margins stable without hurting asset quality. Going forward, the bank may see some NPA risks emanating from its exposure to the power sector, particularly SEBs (state electricity boards). The margins (NIMs) may remain stable with fall in interest costs.

    Concentration on Corporate & SME
      9mFY12 % of total 9mFY13 % of total Change
    Advances 2,461,511   2,867,660   16.5%
    Agriculture 221,536 9.0% 195,001 6.8% -12.0%
    Retail 823,618 33.5% 965,280 33.7% 17.2%
    Corporate 676,915 27.5% 823,018 28.7% 21.6%
    SME 98,460 4.0% 143,383 5.0% 45.6%
    International 639,993 26.0% 739,856 25.8% 15.6%
    Deposits 2,605,890   2,864,180   9.9%
    CASA 1,135,370 43.6% 1,171,370 40.9% 3.2%
    Term deposits 1,470,520 56.4% 1,692,810 59.1% 15.1%

  • 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 2012.

  • The gross NPAs (non performing assets) in absolute terms have remained stable over the past 12 months. The gross and net NPAs stood at 3.4% and 0.7% of advances respectively at the end of December 2012 (0.7% in 9mFY12). The NPA coverage ratio stood at 77.7%. The restructured loans comprised 1.5% of ICICI's overall loan book at the end of December 2012. Worth noting that the bank also sold some of its exposure to Kingfisher Airlines to an arm of Srei Infra Finance in 1HFY12.

  • Fee income constituted 32% of ICICI Bank's total income in 9mFY13 as against 38.7% in 9mFY12. The 16% YoY growth in other income was boosted by dividend from subsidiaries.

  • Although ICICI Bank has halved the direct marketing costs, the cost of operating the incremental branches increased by 17% YoY and the cost to income ratio reduced to 41% from 44% in 9mFY12.

What to expect?
At the current price of Rs 1,188, the stock is trading at a multiple of 1.7 times our estimated FY15 consolidated adjusted book value (excluding insurance businesses). The bank's performance boosts our confidence with regard to its margins and asset quality. Also, ICICI Bank's CAR (capital adequacy ratio) of 19.5% at the end of December 2012 is amongst the highest in the sector. This gives the bank sufficient headroom for growth even after complying with the Basel II norms. While NPA risks cannot be ruled out, we do not see the same significantly impacting the bank's long term fundamentals. We recently recommended investors to Hold on to the stock.

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