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ICICI Bank: Reaping the benefits of restructuring

Feb 1, 2012

ICICI Bank declared the results for the third quarter and first nine months of financial year 2011-2012 (9mFY12). The bank has reported 17% YoY growth in net interest income and 23% YoY growth in net profits for the nine month period. Here is our analysis of the results.

Performance summary
  • Interest income grows by 30% in 9mFY12 on the back of 21% YoY in advances while net interest margin (NIM) remains stable at 2.6%.
  • Operating costs move up with cost to income ratio at 44% in 9mFY12 (41% in 9mFY11).
  • Capital adequacy ratio healthy at 18.9% at the end of December 2011.
  • Net NPAs improve to 0.7% of advances in 9mFY12 (1.2% in 9mFY11).
  • Other income grows by just 5% in 9mFY12 due to stagnant fee to other income ratio.
  • Bottomline grows by 23% YoY in 9mFY12 largely due to write back of provisioning. Provision coverage ratio at 79% in December 2011.

Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income 66,959 85,918 28.3% 188,176 243,680 29.5%
Interest Expense 43,842 58,798 34.1% 123,104 167,386 36.0%
Net Interest Income 23,117 27,120 17.3% 65,072 76,294 17.2%
NIM (%)       2.6% 2.6%  
Other Income 17,487 18,918 8.2% 50,072 52,743 5.3%
Other Expense 17,179 19,167 11.6% 47,717 56,288 18.0%
Provisions and contingencies 4,642 3,411 -26.5% 19,032 11,137 -41.5%
Profit before tax 18,783 23,460 24.9% 48,395 61,612 27.3%
Tax 4,413 6,179 40.0% 11,401 15,976 40.1%
Profit after tax / (loss) 14,370 17,281 20.3% 36,994 45,636 23.4%
Net profit margin (%) 21.5% 20.1%   19.7% 18.7%  
No. of shares (m)         1,152.6  
Book value per share (Rs)*         529.0  
P/BV (x)         1.7  
* (Book value as on 30th December 2011)

What has driven performance in 9mFY12?
  • In what seems to be positive fallout of the business restructuring that ICICI Bank has undertaken since 2008, the bank not just managed to sustain a healthy balance sheet growth rate but also margins and asset quality during the first nine months of FY12. ICICI Bank maintained a cautious growth rate in 9mFY12 keeping a close eye on CASA deposits and net interest margins. The bank's advances grew by 21% YoY in 9mFY12. This was backed by 20% YoY growth in the deposit base. The proportion of low cost deposits (CASA) dropped from 44% in 9mFY11 to 42% in 9mFY12 due to higher interest rates offered on term deposits. On the assets side, ICICI Bank has arrested the fall in retail advances despite keeping the proportion lower. 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, however, the bank may see some NPA risks emanating from its exposure to the power sector (5% of total loan book), particularly SEBs (state electricity boards). Having said that, we do not see the entire SEB exposure turning bad as most of the loans carry government guarantee.

    Concentration on Corporate & SME
      9mFY11 % of total 9mFY12 % of total Change
    Advances 1,942,010   2,339,520   20.5%
    Agriculture 174,781 9.0% 166,106 7.1% -5.0%
    Retail 796,224 41.0% 783,739 33.5% -1.6%
    Corporate 388,402 20.0% 617,633 26.4% 59.0%
    SME 77,680 4.0% 109,957 4.7% 41.6%
    International 504,923 26.0% 662,084 28.3% 31.1%
    Deposits 2,177,470   2,605,890   19.7%
    CASA 962,000 44.0% 1,135,370 42.1% 18.0%
    Term deposits 1,215,470 56.0% 1,470,520 57.9% 21.0%

  • The bank had 1.8% of its investments in security receipts of asset reconstruction companies and 1.3% of its investments in credit derivative exposure (on and off balance sheet) at the end of December 2011.

  • The gross NPAs (non performing assets) in absolute terms have remained stable over the past 12 months. The gross and net NPAs stood at 4.2% and 0.7% of advances respectively at the end of December 2011. The NPA coverage ratio stood at 79%, above the RBI mandate of 70%. While the coverage ratio is comfortable at the current stage, we believe that the act of writing back provisions to perk up profits was a little premature given the lingering delinquency risks.

  • Fee income constituted 39% of ICICI Bank's total income in 9mFY12 same as in 9mFY11. The 5% YoY growth in other income was despite losses in the treasury portfolio.

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

What to expect?
At the current price of Rs 885, the stock is trading at a multiple of 1.4 times our estimated FY14 consolidated adjusted book value (excluding insurance businesses). The bank's margins and other income potential do have substantial upside in the long term. Also, ICICI Bank's CAR (capital adequacy ratio) of 18.9% at the end of December 2011 was 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 reiterate our positive view on the stock.

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