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ICICI Bank: Delinquencies take toll

Apr 28, 2007

Performance Summary
ICICI Bank reported subdued results for the fourth quarter and fiscal ended March 2007. Despite continued robustness in incremental advances and deposit accretion coupled with buoyancy in fee income, the higher asset slippage has dented the bank’s bottomline. Decline in net interest margins (NIMs) and higher provisions have impacted the bottomline growth, which has underperformed growth in topline during FY07. Strong numbers from the rural and international fronts have, however, aided the overall performance during the said periods.

Rs (m) 4QFY06 4QFY07 Change FY06 FY07 Change
Income from operations 41,483 66,615 60.6% 143,061 229,942 60.7%
Interest Expense 27,742 47,868 72.5% 95,975 163,585 70.4%
Net Interest Income 13,741 18,747 36.4% 47,086 66,357 40.9%
Net interest margin (%)       2.8% 2.6%  
Other Income 13,591 18,339 34.9% 41,809 59,292 41.8%
Other Expense 14,947 19,205 28.5% 50,011 66,905 33.8%
Provisions and contingencies 3,545 8,763 147.2% 7,918 22,264 181.2%
Profit before tax 8,840 9,118 3.1% 30,966 36,480 17.8%
Tax 941 866 -8.0% 5,566 5,378 -3.4%
Profit after tax/ (loss) 7,899 8,252 4.5% 25,400 31,102 22.4%
Net profit margin (%) 19.0% 12.4%   17.8% 13.5%  
No. of shares (m)       889.8 899.3  
Diluted earnings per share (Rs)*       28.5 34.6  
P/E (x)*         27.0  
* On a trailing 12-month basis

Company background
ICICI Bank, in terms of asset size, is the second largest bank in the country after SBI. At the end of March 2007, the bank had a franchise of over 3,271 ATMs and 755 branches spread across the country. Retail assets constituted 65% of advances in FY07. The bank is focusing on loan origination in the retail and agriculture segments and on non-fund based products and services, as well as capitalising on opportunities presented by the domestic and international expansion of Indian companies.

What has driven performance in 4QFY07?
‘International’ prominence: As in the past few quarters, retention of its market share across categories was the mainstay of ICICI Bank’s performance in the final quarter of FY07. While the bank, which saw its advances grow by a strong 34% YoY in FY07, outperformed the sectoral average (28% YoY) as well as the figures clocked by most of its peers, sustenance of margins seems to be an issue despite exposure to high risk weighted assets. The growth in assets was duly aided by the bank’s initiatives in the rural and international markets. While the rural portfolio grew by 37% YoY, total advances of the bank’s international branches, levered by the bank’s Indian corporate clientele overseas, reported a growth of 95% YoY. The 39% YoY growth in retail segment continues to help the bank in retaining the distinction of having the largest retail asset base in India. The bank, however, chose to reduce its exposure to the domestic corporate assets in this fiscal.

  FY06 % of total FY07 % of total Change
Advances 1,461,630   1,958,660   34.0%
Retail 921,980 63.1% 1,276,890 65.2% 38.5%
Corporate 267,540 18.3% 235,880 16.1% -11.8%
Rural 146,870 10.0% 201,790 13.8% 37.4%
International 125,240 8.6% 244,100 16.7% 94.9%
Investments 715,480   912,580   27.5%
Deposits 1,650,830   2,305,100   39.6%
Borrowings 354,770   476,290   34.3%
eICICI borrowings 131,900 37.2% 111,900 23.5% -15.2%
Other borrowings 222,870 62.8% 364,390 76.5% 63.5%
Credit /Deposit 88.5%   85.0%    

ICICI Bank has continued to enjoy the benefits of shedding off the erstwhile ICICI’s high cost borrowings (comprising 24% of total borrowings at the end of March 2007 against 37% in March 2006). On the deposits front, during FY07, the bank witnessed a growth of 40% YoY in its deposit base against the average industry growth rate of just over 18%. The bank has 12% share of the system deposits. It has, however, not specified the proportion of low cost deposits in its deposit portfolio. The bank estimates its advance growth to continue at a multiple of 3 times the economy’s GDP growth - at 25% (i.e. 3x of FY08E GDP growth of 8.5%).

‘Non-collateral’ slippages: The bank’s net NPAs (as percentage of total advances) increased to 1% in FY07, from 0.7% in FY06. This was seemingly a result of incremental delinquencies (slippages in asset quality) in the retail portfolio. The net NPAs in the home loan portfolio stood at 0.7%. Also, the bank clarified that 54% of the NPAs were from non-collateralised assets such as personal loans and credit cards. Importantly, despite the consistent rise in net NPAs over the past few quarters, the provisioning cover has continued to decline, which calls for additional risk mitigation.

Fee growth cushions profitability: Fee income (constituting 40.5% of ICICI Bank’s total income) grew by a robust 29% YoY during 4QFY07 (45% YoY in FY07). Of this, 55% of the fee income was derived from retail assets while the remaining 45% were from corporate and international assets. In fact, corporate and international assets have been a significant contributor to the bank’s profitability over the past few quarters and considering that, in the future, the bank is expected to successfully leverage its corporate client base overseas, it may well be able to sustain this strong growth rate in the future as well.

Fund raising for Basel II: ICICI Bank’s CAR (capital adequacy ratio) declined to 11.7% in FY07 from 13.4% at the end of March 2006 due to higher asset growth and exposure to risky assets. Towards shoring up the capital base for complying with the Basel II norms (the RBI having already issued final guidelines for the same) as also to meet up the expected growth in credit, the bank has decided to raise capital to the tune of US$ 5 bn (Rs 200 bn) through a follow on issue in the domestic market as well as an ADR issue in FY08.

What to expect?
At the current price of Rs 862, the stock is trading at 2.9 times our estimated FY09 adjusted book value. Although ICICI Bank’s growth prospects across product categories appear enthusing, our concerns with respect to the bank’s increasing delinquencies and pressure on margins were vindicated yet again in 4QFY07. Having said that, while the medium term prospects of the bank appear robust given the higher capital adequacy, strong retail penetration and relationship with the Indian corporates abroad, we see most of these already having been factored into its stock price. This calls for high degree of caution with respect to investment in the stock.

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Feb 17, 2020 03:35 PM


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