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ICICI Bank: Lower costs help meet FY14 profit estimates - Views on News from Equitymaster
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  • May 2, 2014 - ICICI Bank: Lower costs help meet FY14 profit estimates

ICICI Bank: Lower costs help meet FY14 profit estimates
May 2, 2014

ICICI Bank declared the results for the fourth quarter and financial year 2013-14 (FY14). The bank has reported 19% YoY growth in net interest income and 18% YoY growth in net profits for FY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 19% in FY14 on the back of 17% YoY growth in advances while net interest margin (NIM) improved to 3.3% from 3.1% in FY13.
  • Cost to income ratio reduces to 38% from 40% in FY13.
  • Capital adequacy ratio healthy at 17.7% at the end of March 2014.
  • Net NPAs rise to 0.8% of advances in FY14, from 0.6% in FY13. Restructured loans (up 98% YoY) at 3.1% of advances in March 2014 as against 1.8% in March 2013.
  • Bottomline grows by 18% YoY in FY14 largely due to higher interest margins and cost efficiency.

Standalone financials FY13
Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Interest income 103,653 114,892 10.8% 400,756 441,781 10.2%
Interest Expense 65,621 71,327 8.7% 262,091 277,025 5.7%
Net Interest Income 38,032 43,565 14.5% 138,665 164,756 18.8%
NIM (%)       3.1% 3.3%  
Other Income 22,081 29,760 34.8% 83,457 104,278 24.9%
Other Expense 24,072 28,791 19.6% 90,128 103,088 14.4%
Provisions and contingencies 4,600 7,137 55.2% 18,025 26,264 45.7%
Profit before tax 31,441 37,397 18.9% 113,969 139,682 22.6%
Tax 8,400 10,877 29.5% 30,712 41,576 35.4%
Profit after tax / (loss) 23,041 26,520 15.1% 83,257 98,106 17.8%
Net profit margin (%) 22.2% 23.1%   20.8% 22.2%  
No. of shares (m)         1,155.0  
Book value per share (Rs)*          660.0  
P/BV (x)         1.9  
* (Standalone book value as on 31st March 2014)

What has driven performance in FY14?
  • Continuing to show signs of concern in its asset quality, ICICI Bank ended FY14 with sluggish pace of growth in credit and further rise in restructured loans. The improved CASA proportion however came handy and helped the bank improve its net interest margins at a time when most other are feeling the pressure of higher cost. The bank's NIMs at 3.3% at the end of March quarter is higher than 3.1% in March 2013. It has also managed to retain margins at the same level for the past 5 quarters. In terms of loan growth and deposit growth, ICICI Bank's numbers have come in line with the growth rate posted by most of its private sector peers.

    On the assets side, ICICI Bank has kept the proportion of corporate advances in check and reduced the SME exposure. However most of the incremental lending was to the retail segment. The upside in margins (NIMs) may be capped going forward with a possibility of rise in interest costs.

    Loan growth focus shifts from corporate to retail
      FY13 % of total FY14 % of total Change
    Advances 2,902,490   3,387,030   16.7%
    Retail 1,073,921 37.0% 1,320,942 39.0% 23.0%
    Corporate 943,309 32.5% 1,019,496 30.1% 8.1%
    SME 150,929 5.2% 149,029 4.4% -1.3%
    International 734,330 25.3% 897,563 26.5% 22.2%
    Deposits 2,926,140   3,319,140   13.4%
    CASA 1,225,770 41.9% 1,423,780 42.9% 16.2%
    Term deposits 1,700,370 58.1% 1,895,360 57.1% 11.5%

  • The bank had 0.5% of its investments in security receipts of asset reconstruction companies and credit derivative exposure (on and off balance sheet) at the end of March 2014.

  • The gross NPAs (non performing assets) in absolute terms have gone up by 9% over the past 12 months. However the steep rise in restructured loans signal possibility of spike in gross NPAs going forward. Net NPAs rose to 0.8% of advances in FY14, from 0.64% in FY13. The restructured loans (up 98% YoY) stood at 3.1% of advances in March 2014 as against 1.8% in March 2013. The gross NPAs in retail loan portfolio stood at 4.4% of advances as against 3.8% in March 2013. The NPA coverage ratio stood at 68.6%. Going forward, the bank remains vulnerable to NPA risks emanating from its exposure to the power sector, particularly SEBs (state electricity boards).

  • Fee income (up 13% YoY) constituted 32.6% of ICICI Bank's total income in FY14 as against 34.7% in FY13. In 2QFY14, ICICI Bank fully recognized the mark-to-market provisions of Rs 2.8 bn on its investment portfolio. Also the bank transferred SLR securities to the tune of Rs 23 bn from AFS and HFT category to HTM category, thereby taking write down of Rs 100 m on account of the movement of bond yields.

  • Lower the direct marketing costs helped ICICI Bank bring down the cost to income ratio to 38% in FY14 from 40% in FY13. The return on equity however remained subdued at 14.9% at the end of FY14.
What to expect?
At the current price of Rs 1,258, the stock is trading at a multiple of 1.6 times our estimated FY16 consolidated adjusted book value (excluding insurance businesses). The bank's performance has been in line with our estimates with regard to profit growth for the full year. However that is essentially due to lower costs and higher net interest margins. The balance sheet growth has come in slightly lower than we had estimated. Moreover the slippage in asset quality remains high. While growth will continue at a muted pace in the near term, ICICI Bank is well capitalized to take advantage of lending opportunities as and when the economy picks up.

Worth noting that we value ICICI Bank at a relative discount to private sector peers due the bank's past history of risky operations and managerial decision making. We are in the process of reviewing our estimates for the bank and will soon update subscribers with the FY17 target price and updated view on the stock.

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