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ICICI Bank: Getting candid on exposing risks
Apr 27, 2009

Performance summary
  • Interest income grows by merely 1.0% YoY in FY09; advances drop by 3.2% 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 FY09 (51% in FY08).
  • Capital adequacy ratio healthy at 15.5% in FY09. Off-balance sheet items are 23% of total risk weighted assets.
  • Gross NPAs higher at 4.1% of advances from 3.0% in FY08; net NPAs at 2.0% (1.5% in FY08).
  • Despite cost curtailment, bottomline falls by nearly 10% YoY in FY09 due to lower fees and higher provisioning.


Standalone numbers
Rs (m) 4QFY08 4QFY09 Change FY08 FY09 Change
Interest income 80,293 75,297 -6.2% 307,883 310,925 1.0%
Interest Expense 59,498 53,908 -9.4% 234,842 227,259 -3.2%
Net Interest Income 20,795 21,389 2.9% 73,041 83,666 14.5%
Net interest margin (%) 2.2% 2.4%
Other Income 23,616 16,737 -29.1% 88,107 76,037 -13.7%
Other Expense 21,505 16,570 -22.9% 81,542 70,451 -13.6%
Provisions and contingencies 9,475 10,845 14.5% 29,045 38,083 31.1%
Profit before tax 13,431 10,711 -20.3% 50,561 51,169 1.2%
Tax 1,933 3,272 69.3% 8,984 13,588 51.2%
Profit after tax/ (loss) 11,498 7,439 -35.3% 41,577 37,581 -9.6%
Net profit margin (%) 14.3% 9.9% 13.5% 12.1%
No. of shares (m) 1,112.7 1,113.3
Book value per share (Rs)* 444.9
P/BV (x) 1.0
* Book value as on 31st March 2009

What has driven performance in 4QFY09?
  • In its attempt to avoid incremental delinquencies and conserve capital, ICICI Bank chose to marginally shrink its balance sheet in FY09. The liquidity pressure was also due to its inability to withhold domestic customer deposits and limited borrowing ability in the overseas markets. Domestic retail and corporate loans together comprised 61% of the bank’s asset book in FY09 as against 73% at the end of FY08. Home loans and auto loans comprised 54% and 29% respectively of the retail loan portfolio.

    Although the bank lost nearly 11% of its deposits during this period, low cost deposits (CASA) continued to comprise 27% of ICICI Bank’s total deposits at the end of FY09. In case of borrowings, overseas borrowings comprised 60% of the bank’s total borrowings at the end of FY09, as was the case at the end of FY08. The bank has underperformed our advances and deposit growth estimates by 10% YoY and 12% YoY respectively in FY09. However, the growth in net interest income is lower by only 5% due to better margins. The bank expects its retail and corporate assets to grow by 5% to 10% YoY in FY10.

    Shrinking balance sheet…
    (Rs m) FY08 % of total FY09 % of total Change
    Advances 2,256,160 2,183,110 -3.2%
    Retail 1,337,903 59.3% 1,069,724 49.0% -20.0%
    Corporate 304,582 13.5% 261,973 12.0% -14.0%
    Rural 164,700 7.3% 218,311 10.0% 32.6%
    SME 45,123 2.0% 87,324 4.0% 93.5%
    International 403,853 11.3% 545,778 25.0% 35.1%
    Total deposits 2,444,310 2,183,480 -10.7%
    CASA 637,800 27.2% 626,680 27.4% -1.7%
    Term deposits 1,806,510 71.3% 1,556,800 73.9% -13.8%
    Credit /Deposit 100.0%   92.3%    

  • The gross NPAs (non performing assets) in absolute terms have nearly doubled in ICICI Bank’s books in the past 12 months. The bank’s net NPAs (as percentage of total advances) increased to 2.0% in FY09, from 1.5% in mFY08. 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 FY09 and the bank stated that 55% of net retail NPA was from unsecured products. The NPA coverage ratio stood at 54%. ICICI Bank has restructured assets worth Rs 11 bn in FY09 and had applications worth Rs 20 bn pending (totally comprising 1% of the bank’s assets) at the end of March 2009.

  • Fee income (constituting 40% of ICICI Bank’s total income) fell by 1.6% YoY during FY09. The 14% YoY drop in other income was, however, primarily due to drop in treasury income and dividend from subsidiaries. The same is 8% YoY higher than our estimates of other income for FY09.

  • ICICI Bank’s Canada subsidiary posted a profit of Canadian dollar 34 m in FY09 with a CAR of 19.9% (assets of Canadian dollar 6.4 bn). The UK subsidiary had a net profit of US$ 6.8 m and CAR of 18.4% at the end of March 2009 (assets of US$ 7.3 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 80% YoY in FY09. The bank’s consolidated profit increased by 5% YoY in FY09.

  • 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 FY09).

What to expect?
At the current price of Rs 433, the stock is trading at a multiple of 1.0 time our estimated FY11 standalone adjusted book value (including ICICI Home Finance). While it is encouraging to note that ICICI Bank is getting very candid about the disclosures of off-balance sheet items and exposures to international assets, the potential risks to the same cannot be sidelined. 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, however, 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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