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ICICI Bank: NPA blushes - Views on News from Equitymaster
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ICICI Bank: NPA blushes
Jul 21, 2007

Performance summary
  • Interest income grows by 50% YoY on the back higher PLR, despite a lower 35% YoY growth in advances. Operating costs remain high with cost to income ratio sustaining at 56%.

  • Net interest margins decline from 2.5% in 1QFY07 to 2.3%

  • Net NPAs higher at 1.3% of advances from 1.0% in 1QFY07.

  • Bottomline grows by 25% YoY, aided by fee income growth, despite higher tax outgo.

Rs (m) 1QFY07 1QFY08 Change
Interest income 50,386 75,661 50.2%
Interest Expense 35,634 58,519 64.2%
Net Interest Income 14,752 17,142 16.2%
Net interest margin (%)  2.5%  2.3%  
Other Income 12,776 17,153 34.3%
Other Expense 15,215 19,053 25.2%
Provisions and contingencies 4,828 5,523 14.4%
Profit before tax 7,485 9,719 29.8%
Tax 1,285 1,969 53.2%
Profit after tax/ (loss) 6,200 7,750 25.0%
Net profit margin (%) 12.3% 10.2%  
No. of shares (m) 899.2 903.0  
Book value per share (Rs)* 270.4 273.4  
P/BV (x)   3.6  
* Book value as on 30th June 2007

Company background
ICICI Bank, in terms of asset size, is the second largest bank in the country after SBI. At the end of March 2007, the bank had a franchise of over 3,271 ATMs and 755 branches spread across the country. Retail assets constituted 65% of advances in FY07. 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 1QFY08?
Slowdown takes toll: Retention of its market share across loan categories through aggressive growth strategies does not seem to have worked well for ICICI Bank, as the slowdown in incremental credit offtakes has had a negative impact on the bank’s margins during 1QFY08. The bank’s advance growth slowed down to 35% YoY in 1QFY08 from 50% in 1QFY07. Retail assets continue to enjoy dominance in the bank’s portfolio allocation (64% in 1QFY08). Having said that, given the rise in lending rates, the corresponding growth in the bank’s retail assets (29% YoY) has nearly been half of that clocked in the corresponding quarter of FY07 (59% YoY).

While the bank outperformed the sectoral average advance growth during the quarter (24% YoY), sustenance of margins seems to be an issue despite exposure to high risk weighted assets. ICICI Bank, having primarily relied on volumes rather than profitability seems to be feeling the pinch of lower volumes and provisioning pressure on the high-risk assets, combined with lower spreads. The same has dented its net interest margin (NIM) by 20 basis points (0.2%). The growth in assets was nevertheless aided by the bank’s initiatives in the rural and international markets. While the rural portfolio grew by 24% YoY, total advances of the bank’s international branches, levered by its Indian corporate clientele overseas, reported a growth of 119% YoY. The growth in retail segment continues to help the bank in retaining the distinction of having the largest retail asset base in India. The bank, however, seems to have chosen to maintain a status quo with regard to its exposure to the domestic corporate assets in this fiscal.

(Rs m) 1QFY07 % of total 1QFY08 % of total Change
Advances 1,471,840   1,982,770   34.7%
Retail 987,721 67.1% 1,274,160 64.3% 29.0%
Corporate 205,439 14.0% 206,250 14.0% 0.4%
Rural 113,680 7.7% 141,360 9.6% 24.3%
International 165,000 11.2% 361,000 24.5% 118.8%
           
Deposits 1,830,060   2,307,880   26.1%
CASA 384,313 21.0% 507,734 22.0% 32.1%
Term deposits 1,445,747 79.0% 1,800,146 78.0% 24.5%
Credit /Deposit 80.4%   85.9%    

ICICI Bank has continued to enjoy the benefits of shedding off the erstwhile ICICI’s high cost borrowings (comprising 24% of total borrowings at the end of March 2007 against 37% in March 2006). On the deposits front, during 1QFY08, the bank witnessed a growth of 26% YoY in its deposit base against the average industry growth rate of 25%. The bank has 12% share of the system deposits. The proportion of low cost deposits have however remained stagnant at 22%.

‘Non-collateral’ slippages: ICICI Bank’s net NPAs (as percentage of total advances) increased to 1.3% in 1QFY08, from 1.0% in 1QFY07. This was seemingly a result of incremental delinquencies (slippages in asset quality) in the retail portfolio. Also, the bank clarified that 54% of the NPAs were from non-collateralised assets such as personal loans and credit cards. Importantly, despite the consistent rise in net NPAs over the past few quarters, the provisioning cover has continued to decline, which calls for additional risk mitigation.


Fee growth cushions profitability: Fee income (constituting 42% of ICICI Bank’s total income) grew by a robust 35% YoY during 1QFY08. Of this, 55% of the fee income was derived from retail assets while the remaining 45% were from corporate and international assets. In fact, corporate and international assets have been a significant contributor to the bank’s profitability over the past few quarters and considering that, in the future, the bank is expected to successfully leverage its corporate client base overseas, it may well be able to sustain this strong growth rate in the future as well.

Capital comfort: ICICI Bank’s CAR (capital adequacy ratio) was 11.0% in 1QFY08. The bank successfully 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, which will get reflected in the bank’s books in 2QFY08, will enhance its CAR and will entail a dilution of 27% of the current share capital base.

What to expect?
At the current price of Rs 970, the stock is trading at 2.1 times our estimated FY10 adjusted book value. Although ICICI Bank’s growth prospects across product categories appear enthusing, our concerns with respect to the bank’s increasing delinquencies and pressure on margins were vindicated yet again in 1QFY08. The 20 basis points fall in NIMs were particularly shocking and in the event of no improvement in the same in the forthcoming quarters, we may have to revise our estimates for the bank. 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 to the bank. We maintain our view on the stock.

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