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Analyst meet extracts: ICICI Bank - Views on News from Equitymaster
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Analyst meet extracts: ICICI Bank
May 11, 2005

In a recent analyst meet, ICICI Bank briefed us about its progress on its key business segments and the new ones it is venturing into. It also gave a perspective on the macro aspects influencing the banking sector.

Macro aspects
While the demand for bank funds from the corporate sector still remains a secluded affair, given the fact that they prefer internal accruals, foreign borrowings and equity resources (in that order) for their funding needs, consumer credit (retail lending) remains the key user of liquidity in the system. The bank expects the total consumer credit to grow by about 27% YoY in FY06, from Rs 1,450 bn to Rs 1,850 bn. On the deposit front, incremental deposits grew at 15% YoY in FY05 and for FY06 too, the bank seconded RBI’s projection of 15% growth rate. This is based on the fact that the historic growth rate of deposits (CAGR) has been 17% over last 30 years. But, interestingly, going forward, the bank does not anticipate much competition from mutual funds, as they do not have the ability to compete in a rising interest rate regime.

Pertaining to ICICI Bank
Retail Banking:  The bank has witnessed a growth of 68% YoY in retail assets (61% of its credit portfolio) during FY05 while the number of customer accounts have bolstered by 32% YoY. ICICI Bank is the market leader in the high yielding auto loan segment (40%) and has a sizeable share in the mortgage loan market (32%) also. Given the low penetration of retail credit in the Indian economy (consumer credit is barely 32% of GDP) the scope for growth in this segment is immense. The fact the bank is now comfortable with regard to fulfilling its SLR requirements (post merger with ICICI, the bank had to park majority of its funds in SLR investments to meet the statutory norms), will also help the bank cater to the incremental credit demand. Also, the retail segment contributed 55% of the fee-based income in FY05.

Asset size in FY05
Product
(Rs bn)
Industry
volumes
ICICI Bank's
volumes
ICICI Bank's
market share
Mortgage 600 189 31.5%
Auto 290 115 39.7%
Commercial 240 67 27.9%
Personal 105 34 32.4%
Two-wheeler 65 23 35.4%
Total 1,300 428 32.9%
Credit cards 13 3.3 25.4%
 
Retail growth FY04 FY05 Growth YoY
Retail assets (Rs bn) 334 561 68.0%
Consumer credit accounts (m) 1.7 2.7 58.8%
Deposit customers accounts (m) 6.4 7.7 20.3%
Credit card customers (m) 2.3 3.3 43.5%
Total customer accounts (m) 10 13.7 31.7%

Corporate Banking:  Although the credit demand from large and medium corporates remains negligible, this is not true in case of SMEs (small and medium enterprises). The bank has been adding an average of 20,000 SME accounts per month in FY05. But this segment is particularly of interest to the bank for the fee income garnered through transaction banking, loan syndication and securitisation. ICICI Bank had a market share of 41% in securitisation deals in FY05.

International franchise:  The bank expects the global business to contribute 33% of bottomline in the next three years (from 12% in FY05). Its prime target customers in this segment are the NRIs and Indian corporates having overseas operations. While the latter remains a strong contributor to fee income, the bank expects that upto 10% of the incremental home loan disbursals will be to NRIs in FY06. The bank however, considers overseas acquisitions a capital-intensive proposition and would rather like to partner with other banks abroad to cross-sell their products. For instance, in the UK it has a partnership with Lloyds Bank.

New initiative - rural financing:  ICICI Bank considers agri lending as a very viable business proposition. The rural penetration will however, not be by way of branches as that is not workable in terms of costs. Instead the bank has adopted the strategy of partnering with micro-credit institutions, corporates providing inputs or buying products from the farmer and self-help groups. It already has an asset base of Rs 4.3 bn and a client base of 1 m households in micro finance credit.

Subsidiaries:  The bank reiterated its view that most of its subsidiaries are already generating substantial business and on listing will ‘unlock value’ for the parent company (ICICI Bank). The bank also clarified its willingness to divest stake in the insurance subsidiaries (although not below 51%) and was of the view that the general insurance company (ICICI Lombard), which is giving 20% ROE, could go to market anytime. The life insurance business (ICICI Prudential) however, continues to be in the gestation stage and a drag on the bottomline.

The consolidated picture…
(Rs bn) FY04 FY05 Change
ICICI Bank's standalone profit 16.4 20.1 22.6%
Add /(Less): Profit/ (Loss) from subsidiaries      
ICICI Securities 1.7 0.6 -64.7%
ICICI Venture 0.3 0.3 0.0%
ICICI Prudential Life -1.6 -1.5 -193.8%
ICICI Lombard 0.2 0.4 100.0%
Less: Dividend and other adjustments 1.1 1.3 18.2%
Consolidated profit 15.9 18.6 17.0%

Our view:
At the current price of Rs 389, ICICI Bank is trading at 2.2 times its FY05 (standalone) adjusted book value. This puts it at the higher end of the valuation spectrum. Although the bank has considerably improved its asset quality (net NPA to advances ratio was 2% in FY05) over the years, the same remains high as compared to its peers. No doubt, the re-pricing of funds (due to repayment of erstwhile ICICI borrowings) will also continue to bring in margin benefits in the coming quarters, however, we believe that much of this is already factored into the prices and the potential upside in the stock is limited. Although on a standalone basis the stock does not seem to be very attractive at the current levels, the unlocking of value from its subsidiaries (as and when it comes) will bring an upside.

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