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ICICI Bank: Consistent improvement - Views on News from Equitymaster
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ICICI Bank: Consistent improvement
Jul 23, 2004

Introduction to results
ICICI Bank has reported a strong growth in its bottomline for the first quarter of FY05. This comes despite a fall in the topline. Fall in interest expenses has led to a strong growth in net interest income, which in turn has contributed to the bottomline growth.

(Rs m) 1QFY04 1QFY05 Change
Income from operations 22,947 21,958 -4.3%
Other income 6,438 6,577 2.2%
Interest expenses 18,402 15,652 -14.9%
Net interest income 4,545 6,306 38.7%
Other expenses 5,939 7,324 23.3%
Operating profit (1,394) (1,019)  
Operating profit margin (%) -6.1% -4.6%  
Provisions and contingencies 1,237 458 -62.9%
Profit before tax 3,808 5,100 33.9%
Tax 406 793 95.5%
Profit after tax/(loss) 3,402 4,307 26.6%
Net profit margin (%) 14.8% 19.6%  
No. of shares (m) 612.6 731.4  
Diluted earnings per share 18.6 23.6  
P/E ratio   11.0  
*(annualised)      

What is the company’s business?
ICICI Bank post merger with its parent ICICI has emerged as the second largest bank in the country after SBI in terms of asset size. The bank provides a range of corporate and retail banking services. ICICI Bank also prides itself as the first universal bank in the country due to the fact that it provides a wide variety of services. It is also the first Indian bank to offer Internet banking and also the first Indian bank to list on NYSE. At the end of FY04 the bank had an ATM network of over 1,500 ATMs and 540 branches spread across the country.

What has driven the performance in 1QFY05?
Sales:The bank's topline has been falling despite a growth in advances, which have registered a growth of 45% in the June quarter on a YoY basis. This was mainly on account of strong growth (62%) 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. However, a strong focus on retail assets, especially home loans, which have a lower yield, may be the cause of the fall in the bank's topline.

Operating margins:The bank has managed to bring down its interest expenses and this has helped it significantly improve its net interest income and consequently, its net interest margins (NIM). Cost of deposits have reduced to 4.5% in the June quarter from 6% last year. In a bid to reduce its interest expenses, the bank is steadily pruning its borrowings in order to leverage more on low cost savings and current deposits. Currently, NIM stands at 2.3%. We expect a continuous improvement in this going forward due to further repricing of deposits. Operating expenses continue to rise led by the bank's infrastructure expansion initiatives to capture the credit growth potential in the country.

Net Profits: There has been a significant improvement (77%) in core fee based income. At the same time, there has been a strong fall in the bank's treasury profits due to which other income has declined in the June quarter compared to the same period last year. Provisioning for NPAs has fallen significantly in the June quarter and this has to an extent helped in the improvement of the growth in bottomline. Net NPA to advances ratio stands at 2.7% 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. We feel that due to the lower levels of NPAs achieved till now, the bank has chosen to pare down its NPA provisioning.

What to expect?
At the current price of Rs 260, the stock is trading at a P/E multiple of 11x annualised 1QFY05 earnings. ICICI Bank is slowly addressing all the concerns plaguing it and this is likely to improve investor sentiment towards the bank. However, it remains to be seen whether this growth momentum can be maintained with competition getting aggressive and fears of strengthening interest rates, which could slow down retail credit growth. A cautious approach is warranted.

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