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ICICI Bank: Big may not be beautiful - Views on News from Equitymaster
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ICICI Bank: Big may not be beautiful
Apr 28, 2008

Performance summary
  • Interest income grows by 34% YoY in FY08 on the back of 15% YoY growth in advances.

  • Operating costs drop marginally with cost to income ratio at 51%.

  • Net interest margin remains stable at to 2.2% due to doubling of low-cost overseas borrowing.

  • Capital adequacy ratio comfortable at 13.9% post capital raising in 2QFY08.

  • Net NPAs higher at 1.5% of advances from 1.3% in 2QFY08 and 1.0% in FY07.

  • Bottomline grows by 34% YoY during the fiscal, despite higher tax outgo; profits aided by higher fee income.

Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change
Interest income 66,615 80,293 20.5% 229,942 307,883 33.9%
Interest Expense 47,868 59,498 24.3% 163,585 234,842 43.6%
Net Interest Income 18,747 20,795 10.9% 66,357 73,041 10.1%
Net interest margin (%)       2.2% 2.2%  
Other Income 18,339 23,617 28.8% 59,292 88,108 48.6%
Other Expense 19,205 21,505 12.0% 66,905 81,542 21.9%
Provisions and contingencies 8,763 9,475 8.1% 22,264 29,046 30.5%
Profit before tax 9,118 13,432 47.3% 36,480 50,561 38.6%
Tax 866 1,933 123.2% 5,378 8,984 67.1%
Profit after tax/ (loss) 8,252 11,499 39.3% 31,102 41,577 33.7%
Net profit margin (%) 12.4% 14.3%   13.5% 13.5%  
No. of shares (m)       899.3 1,112.6  
Book value per share (Rs)*         417.7  
P/BV (x)         2.2  
* Book value as on 31st March 2008

What has driven performance in FY08?
  • Domestic pain: The pains in the domestic lending market seem to have hit ICICI Bank relatively hard as the bank nearly failed to have any plausible growth in its domestic portfolio in FY08. Had it not been for the bank’s reasonable presence in the international markets, the results for the fiscal could have painted a very sorry picture. In line with the sector, ICICI Bank witnessed a moderation in its asset growth and clocked advance growth of 15% YoY in FY08 against 33% YoY in 1HFY08 and 34% YoY in FY07. Including the securitised assets, the growth in advances stood at 26% YoY. However, the same has been lower than our estimate of 29% YoY for the fiscal. Further, while retail assets continued to enjoy dominance in the bank’s portfolio allocation, the proportion of the same reduced substantially (58.4% in FY08). It was largely on the back of the SME (small and medium enterprises) and international assets that the bank managed some growth in its advance book.

    Overseas borrowings comprised 23% of ICICI Bank’s total deposits and borrowings at the end of FY08. This also helped the bank to sustain its NIMs at 2.2%, as international funds are sourced at relatively lower costs (LIBOR plus 0.9%) than domestic funds.

    Overseas opportunity saves the day…
    (Rs m) FY07 % of total FY08 % of total Change
    Advances 1,958,660   2,256,160   15.2%
    Retail 1,277,030 65.2% 1,316,630 58.4% 3.1%
    Corporate 264,419 13.5% 270,739 12.0% 2.4%
    Rural 142,982 7.3% 146,650 6.5% 2.6%
    SME 30,129 2.0% 44,680 2.0% 48.3%
    International 244,100 12.5% 477,460 21.2% 95.6%
               
    Deposits 2,305,100   2,444,310   6.0%
    CASA 502,140 21.8% 637,810 26.1% 27.0%
    Term deposits 1,802,960 78.2% 1,806,500 73.9% 0.2%
    Credit /Deposit 85.0%   92.3%    

  • ‘Absolute’ slippages: The pressure of undercutting its peers by offering very competitive interest rates, especially in retail loans seems to have shown its colours as the gross NPAs in absolute terms has nearly doubled in ICICI Bank’s books. The bank’s net NPAs (as percentage of total advances) increased to 1.5% in FY08, from 1.0% in FY07. The level of incremental delinquencies (slippages in asset quality) has been sequentially increasing every quarter for the past four quarters. Also, the bank clarified that 75% of the retail NPAs were from non-collateralised assets such as personal loans and credit cards. Retail NPAs were 73% of the bank’s gross NPAs in FY08. Net NPAs in the retail book were to the tune of 3.5% (1.5% in FY07).

  • Fee growth aids profitability: Fee income (constituting 41.6% of ICICI Bank’s total income) grew by a robust 32% YoY during FY08. Of this, 55% was derived from retail assets while the remaining 45% was from corporate and international assets. The reason for the growth in fee to total income proportion (40.5% in FY07) can be attributed to the increased share of interest income from the overseas branches. International business comprised 21% of the bank’s consolidated banking assets in FY08.

  • Capital comfort: ICICI Bank undertook a capital raising exercise of about Rs 200 bn (US$ 4.9 bn) through a simultaneous public issue in India and issue of American Depositary Shares (ADS). The issue entailed a dilution of 27% of the capital base and improved its CAR to 13.9% in FY08. However, this has diluted the bank’s return on net worth (RONW) to 11.1%, from 13% in 9mFY07. Going forward, the bank plans to leverage its equity book for funding its expansion plans.

  • Subsidiaries: ICICI Bank’s life and non-life insurance businesses retained market share of 13.1% and 12.3% respectively. The life insurance business had a NBAP (new business achieved profit) margin of 19.2% while the general insurance business grew its profits by 50.5% (though on a very small base) in FY08. The bank has no plans of listing these subsidiaries in the near term.

What to expect?
At the current price of Rs 910, the stock is trading at 2.0 times our estimated FY10 adjusted book value. The bank has deferred its plans to list its security broking subsidiary that was earlier planned for 1HFY09. We may have to revise our estimates for the bank downwards due to the underperformance with regard to advance growth and asset quality. There is also no clarity on the position of the bank’s derivative portfolio. Although ICICI Bank’s growth prospects across product categories especially international assets appear enthusing, our concerns with respect to the bank’s increasing delinquencies remain undiluted. 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 quality with growth might prove detrimental.

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