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ICICI Bank: Dwindling profits… - Views on News from Equitymaster

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ICICI Bank: Dwindling profits…
Jul 22, 2006

Performance summary
The largest retail banking entity in the country, ICICI Bank, declared its 1QFY107 results. The scintillating growth that the bank managed to clock over the past few quarters seems to be weighing heavy on its books now. While a change in the accounting policy has safeguarded its NIMs, a fall in credit deposit ratio and incremental slippages in retail assets signal caution. The growth in fee income and international business, however, continue to remain the key profit drivers.

Rs (m) 1QFY06 1QFY07 Change
Income from operations 31,159 50,386 61.7%
Other Income 10,905 12,776 17.2%
Interest Expense 21,465 35,633 66.0%
Net Interest Income 8,512 14,753 73.3%
Net interest margin 2.4% 2.5%  
Other Expense 10,891 15,214 39.7%
Provisions and contingencies 2,978 4,829 62.2%
Profit before tax 6,730 7,486 11.2%
Tax 1,429 1,285 -10.1%
Profit after tax/ (loss) 5,301 6,201 17.0%
Net profit margin (%) 17.0% 12.3%  
No. of shares (m) 739.0 891.9  
Diluted earnings per share (Rs)* 28.7 28.3  
P/E (x)   17.2  
* (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 1QFY07, the bank had a franchise of over 2,275 ATMs and 625 branches spread across the country. Retail assets constituted 6.7% of advances in 1QFY07. 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 1QFY07?
Asset mix skewed towards risk: ICICI Bank once again managed to register an impressive 50% YoY growth in advances and 61% growth in deposits in 1QFY07. The same is especially noteworthy, as the bank has the second largest advance book and the largest retail asset portfolio in the country. However, the growth numbers are smaller than that witnessed over the past few quarters. Also, the fall in credit deposit ratio manifest the liquidity pressures being borne by the bank. It must further be noted that CASA comprised less than 20% of the total deposits in 1QFY07, thus suggesting that the bank largely accessed high-cost bulk deposits during the period under consideration.

C/D: Signs of slowdown…
(Rs m) 1QFY06 % of total 1QFY07 % of total Change
Advances 979,088   1,471,842   50.3%
Retail 620,630 63.4% 986,870 67.1% 59.0%
Corporate 358,458 36.6% 484,972 32.9% 35.3%
Deposits 1,137,784   1,830,064   60.8%
Credit deposit ratio 86.1%   80.4%    

An analysis of the retail credit portfolio (67% of advances) further suggests that the bank bolstered its loan book on the back of higher exposure to risk weighed assets (personal loans and credit cards). While the same pushed its asset yield upwards, at the same time, it also had an impact on the delinquencies.

Change in retail asset mix
(Rs bn) 1QFY06 % of total 1QFY07 % of total Change
Home loans 325 52.3% 495 50.2% 52.3%
Car loans 118 19.0% 192 19.5% 62.7%
Commercial loans 73 11.8% 115 11.7% 57.5%
2 wheeler loans 12 1.9% 21 2.1% 76.5%
Personal loans 28 4.5% 70 7.1% 150.0%
Credit cards 20 3.2% 35 3.5% 75.0%
Loans against shares 18 2.9% 22 2.2% 22.2%
Other loans 27 4.3% 37 3.7% 37.0%
Total retail advances 621   987   59.0%

The NIMs of the bank improved by 10 basis points to 2.5% in this quarter due to change in accounting policy. The DMA (direct marketing agent) expenses on automobile loans, which was earlier deducted from net interest income, are now classified under other expenses. With consideration of this accounting change, the NIMs come to 2.25% (15 basis points lower). However, home loans to the tune of Rs 400 bn are set to get re-priced by 100 basis points in July 2006 and can relive some pressure.

Steady fee growth: 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 (51% YoY in 1Q07). The fee income to total income stands at 36%. The bank’s retail portfolio contributed to 60% of the fee-income while the corporate and international portfolios contributed 25% and 15% respectively. Going forward, the bank sees resurgence in fee-income from the corporate segment. The fee income also managed to cushion the bottomline against the treasury losses (treasury income fell by 50% during the quarter). With 80% of investments in the HTM basket, the treasury portfolio remains well hedged.

Quality – slippery once again: 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. However, the same have risen to 0.8% in 1QFY07 largely due to the retail assets, suggesting higher propensity of slippage in the incremental assets.

CAR- Basel II compliant: The capital adequacy ratio (CAR) of the bank that currently stands at 12.5% will come to 12.8% after the compliance with Basel II norms (as per the bank’s calculations). The improvement in CAR is because of a reclassification of part of the equity investment in subsidiaries from Tier-I to Tier-II. The bank thus stands well capitalised to fund its future growth.

What to expect?
At the current price of Rs 485, the stock is trading at 1.7 times our estimated FY08 adjusted book value. A comfortable CAR, lower cost to income ratio (40% in 1QFY07) and scalability position the bank very favourably amongst its peers. Nevertheless, the bank’s affinity to risky asset cannot be ignored. It must, however, be noted that the valuations of the bank are based on its standalone numbers. While the life insurance subsidiary currently continues to pare the consolidated valuations of the bank, we see the insurance subsidiaries unlocking value for the bank once they are listed (by FY10), and the securities trading and asset management ventures being significantly revenue accretive over the longer term.

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