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  • Feb 3, 2015 - ICICI Bank: Profits subject to provision coverage risk

ICICI Bank: Profits subject to provision coverage risk
Feb 3, 2015

ICICI Bank declared the results for the third quarter and first nine months of financial year 2014-15 (9mFY15). The bank has reported 15% YoY growth in both net interest income and net profits for 9mFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 15% in 9mFY15 on the back of 13% YoY growth in advances while net interest margin (NIM) improved to 3.4% from 3.3% in 9mFY14.
  • Cost to income ratio reduces to 37% from 38% in 9mFY14.
  • Capital adequacy ratio healthy at 16.4% at the end of December 2014.
  • Net NPAs rise to 1.1% of advances in 9mFY15, from 0.8% in 9mFY14. Restructured loans (up 61.7% YoY) at 3.2% of advances in December 2014 as against 2.0% in December 2013.
  • Bottomline grows by 15% YoY in 9mFY15 largely due to higher interest margins and cost efficiency.

Standalone financials
Rs (m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Interest income 114,549 124,352 8.6% 326,889 363,526 11.2%
Interest Expense 71,998 76,235 5.9% 205,698 223,924 8.9%
Net Interest Income 42,551 48,117 13.1% 121,191 139,602 15.2%
NIM (%)       3.3% 3.4%  
Other Income 28,010 30,916 10.4%  74,517  86,798 16.5%
Other Expense 26,170 28,663 9.5%  74,297  83,884 12.9%
Provisions and contingencies 6,946  9,796 41.0%  19,126  25,552 33.6%
Profit before tax 37,445 40,574 8.4% 102,285 116,964 14.4%
Tax 12,121 11,682 -3.6%  30,699  34,430 12.2%
Profit after tax / (loss) 25,324 28,892 14.1%  71,586  82,534 15.3%
Net profit margin (%) 22.1% 23.2%   21.9% 22.7%  
No. of shares (m)         1,158.5  
Book value per share (Rs)*          141.0  
P/BV (x)         2.5  
* (Standalone book value as on 31st December 2014)

What has driven performance in 2QFY15?
  • Retail credit growth remained the mainstay of ICICI Bank's performance in first nine months of FY15. The high CASA proportion also 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 has managed to retain margins at the same level for the past 6 quarters. In terms of loan growth and deposit growth, On the assets side, ICICI Bank has kept the proportion of corporate and SME loans in check. Hence most of the incremental lending was to the retail segment. There may be further upside in margins (NIMs) with a possibility of fall in interest costs.

    Loan growth focus shifts from corporate to retail
      9mFY14 % of total 9mFY15 % of total Change
    Advances 3,326,320   3,753,450   12.8%
    Retail 1,204,128 36.2% 1,493,873 39.8% 24.1%
    Corporate 1,084,380 32.6% 1,126,035 30.0% 3.8%
    SME  153,011 4.6%  168,905 4.5% 10.4%
    International  884,801 26.6%  964,637 25.7% 9.0%
    Deposits 3,169,700   3,553,400   12.1%
    CASA 1,252,032 39.5% 1,400,040 39.4% 11.8%
    Term deposits 1,917,669 60.5% 2,153,360 60.6% 12.3%

  • Asset quality woes, particularly in terms of loan restructuring, continued to haunt ICICI Bank in the third quarter of FY15. The gross NPAs (non performing assets) in absolute terms have gone up by 10% 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 1.1% of advances in 9mFY15, from 0.7% in 9mFY14. The gross NPAs in retail loan portfolio stood at 3.2% of advances as against 3.4% in December 2013. The NPA coverage ratio stood at 63%, which is very low according to us.

  • Fee income (up 12% YoY) constituted 32.6% of ICICI Bank's total income in 9mFY15 as against 34.7% in 9mFY14.

  • Lower the direct marketing costs helped ICICI Bank bring down the cost to income ratio to 37% in 9mFY15 from 38% in 9mFY14. The return on equity however remained subdued at 14.9% at the end of 9mFY15.
What to expect?
At the current price of Rs 347, the stock is trading at a multiple of 1.9 times our estimated FY17 consolidated adjusted book value (excluding insurance businesses). The bank's performance has been in line with our estimates with regard to profit growth. However that is essentially due to lower costs and higher net interest margins. Moreover the slippage in asset quality remains high. 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. We recommend investors to not buy the stock at current valuations.

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