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ICICI Bank: Profitable growth - Views on News from Equitymaster
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ICICI Bank: Profitable growth
Apr 29, 2006

Performance summary
ICICI Bank declared results for the fourth quarter and year ended March 2006, concluding FY06 on a very positive note. On a consolidated basis, the bank’s performance in FY06 was impressive. In addition to the comfortable credit to deposit ratio, the growth in fee income and international business were key profit drivers. Lower NPA levels and sufficient capital (CAR) place the bank in our comfort zone.

Rs (m) 4QFY05 4QFY06 Change FY05 FY06 Change
Income from operations 26,052 39,897 53.1% 94,099 137,845 46.5%
Other Income 10,323 16,019 55.2% 34,161 49,831 45.9%
Interest Expense 18,151 27,742 52.8% 65,709 95,975 46.1%
Net Interest Income 7,901 12,155 53.8% 28,390 41,870 47.5%
Net interest margin       2.4% 2.4%  
Other Expense 9,452 13,362 41.4% 32,992 44,795 35.8%
Provisions and contingencies 800 5,973 646.6% 4,288 15,941 271.8%
Profit before tax 7,972 8,839 10.9% 25,271 30,965 22.5%
Tax 1,825 941 -48.4% 5,220 5,565 6.6%
Profit after tax/ (loss) 6,147 7,898 28.5% 20,051 25,400 26.7%
Net profit margin (%) 15.4% 30.3%   21.3% 18.4%  
No. of shares (m)       735.9 875.1  
Diluted earnings per share (Rs)*         27.0  
P/E (x)         22.2  
* (12 months trailing)            

Encashing retail
ICICI Bank, in terms of asset size, is the second largest bank in the country after SBI. At the end of 4QFY06, the bank had a franchise of over 1,790 ATMs and 614 branches spread across the country. Retail assets constituted 61% of advances in FY06. 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 4QFY06?
Comfortable CD ratio: Continuing to spearhead the players in the banking sector in terms of asset growth, ICICI Bank registered 61% YoY growth in advances. Of this, 61% comprised of retail assets at the end of FY06. The bank was able to sustain a faster pace in its deposit growth (65% YoY). This has helped bring the credit to deposit ratio to a more comfortable 89% than the unsustainable 92% clocked in FY05. Housing loans comprised 41% of the bank’s total retail disbursements during FY06, of which 30% are loans with ticket size higher than Rs 2 m (requiring higher provisioning with effect from FY07).

C/D: Deposits pick up pace…
(Rs m) 4QFY05 % of total 4QFY06 % of total Change
Advances 914,050   1,461,630   59.9%
Retail 561,330 61.4% 920,827 63.0% 64.0%
Corporate 352,720 38.6% 540,803 37.0% 53.3%
Deposits 998,190   1,650,830   65.4%
Credit deposit ratio 91.6%   88.5%    

The bank also clarified that though its has been able to maintain its NIMs at 2.4% in 4QFY06, the erstwhile ICICI’s high-cost borrowings and commission to auto dealers (which is written off in the 1st year instead of being amortised over the life of the asset) have been 40 basis points and 30 basis points drag on its NIMs respectively. The erstwhile ICICI borrowings comprised 5% of total liabilities at the end of FY06 and borrowings of Rs 25 bn will be repaid in FY07. What, however, remains a concern is that while the CASA (current account and savings account) is a low 23% of total deposits, almost 50% of the bank’s deposits are high-cost bulk deposits that also have the possibility of causing an ALM mismatch (asset liability management).

Fee growth - Going international: Sustenance of highest market share across segments in the retail portfolio has helped ICICI Bank not only in asset growth but also in the fee-income expansion (55% YoY in FY06). The bank’s retail portfolio contributed to 58% of the fee-income while the corporate and international portfolios contributed 32% and 10% respectively. Going forward, the bank sees resurgence in fee-income from the corporate segment (37% of total income currently). The rest of the other income portion (i.e. treasury income) has grown due to sale of its stake in Federal Bank and South Indian Bank during FY06. With 80% of investments in the HTM basket, the treasury portfolio remains well hedged.

Asset size in FY06
Product ( Rs bn) Industry
volumes
ICICI Bank's
volumes
ICICI Bank's
market share
Mortgage 825 257.4 31.2%
Auto 430 173 40.2%
Commercial vehicles 290 92 31.7%
Personal loans 230 65 28.3%
Two-wheeler 92 33 35.9%
Total 1,867 620.4 33.2%
Credit cards 18 5 28.6%

NPAs unloaded: It may be recalled that the resolution of the Dabhol project had led to ICICI Bank selling the underlying collateral and recovering a substantial proportion of NPAs in the second quarter of FY06. In 3QFY06, the bank had further offloaded its stressed assets by selling the NPAs through the first auction of non-performing assets in India, the same having been approved by the RBI. These initiatives along with lower incremental delinquencies pared the bank’s net NPA levels to 0.7% in 4QFY06. The gross and net NPAs in the retail segment are 1.5% and 0.8% respectively.

International foray: Besides its focus on the rural segment (grew 117% YoY in FY06) ICICI Bank sees its international business aiding its growth going forward. The bank’s total assets in international operations (US$ 8.1 bn) comprised 14% of the consolidated banking assets. ICICI also controlled 20% of the market share in inward remittances at the end of FY06.

What to expect?
At the current price of Rs 598, the stock is trading at 2.2 times our estimated FY08 adjusted book value. A comfortable CAR (13.3%), lower cost to income ratio (39% in FY06) and scope for improvement in NIMs position the bank very favourably amongst its peers. While the insurance subsidiaries continue to pare the consolidated valuations of the bank, we see them adding value over the longer term.

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