ICICI Bank, has reported another strong quarter and year of growth. While the bank's topline fell by 5.1% in FY04, bottomline grew by 36% in the same period. For the March quarter too, the results were similar with topline falling by 7.2%, while bottomline grew by nearly 35%. Fall in interest expenses has led to a strong growth in net interest income, which in turn contributed to the bottomline improvement. The bank has also reported a sharp rise in other income, further helping bottomline growth. On account of high operating expenses (the bank is still in expansionary mode) operating margins, however, continue to remain in the negative territory.
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The bank's topline has been falling, which is in line with our research report expectations of a 4% dip in interest income for FY04. Advances on the other hand have grown by 52% for FY04, mainly on account of strong growth (74%) in retail advances during this period. Falling yields may have limited the rise in interest income from advances. In case of the sector as a whole, yields on advances and investments have been falling and ICICI Bank is not an exception. Thus, the fall in topline.
Falling interest rates (cost of deposits have reduced to 5% from 6.2% last year) have helped the bank to significantly reduce its interest expenses, thus improving net interest income considerably. The bank is steadily reducing its borrowings in order to leverage more on low cost savings and current deposits to consistently reduce its interest expenses. Current net interest margin numbers are not available now, we will update the same once we get the bank's detailed press release. According to our assumptions, the bank's net interest margins were expected to be around 2.2% at the end of FY04. We expect a further improvement in the bank's net interest margins going forward due to further repricing of deposits and strong growth in its demand deposit base.
Operating expenses continue to rise owing to the bank's infrastructure expansion initiatives to capture the credit growth potential in the country. The higher expenses are also in part due to a VRS scheme that the bank had initiated in 2QFY04 . Going forward, the savings due to VRS may help in bringing operating expenses under control. The bank's other income has risen in the March quarter but has actually fallen for FY04. While the details are not available at this stage, we believe that there may have been a significant improvement in core fee based income. However, most of the growth in other income is still on account of profits from the sale of G-Secs. Provisioning continues to be high as the bank is trying to aggressively reduce its NPA levels. Net NPA to advances ratio stands at 2.9% compared to 4.9% in FY03. The ratio however, continues to be higher in comparison to other peers like HDFC Bank, UTI Bank and IDBI Bank.
At Rs 315, the stock is trading at a price to adjusted book value multiple of 3.1x. For ICICI Bank, strong focus on retail markets has paid off both on the asset (growth) as well as the liabilities (reduction in interest expenses) front. As the bank continues to focus on reduction of interest expenses, we expect net interest margins for the bank to align more or less in line with industry peers, provided the interest rate regime remains soft. The bottomline growth continues to be high despite high provisioning requirements. ICICI Bank has managed to significantly improve its quality of assets. The improvement in the steel cycle has further helped the cause (a big chunk of bad loans were to this sector). However, its valuations are still at the higher end of the sector valuation spectrum. This is on expectations of continued improvement in its operating parameters and asset quality, which is still lagging behind its private sector peers.
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