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ICICI Bank: NPA concerns remain - Views on News from Equitymaster
 
 
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  • Jul 26, 2003

    ICICI Bank: NPA concerns remain

    ICICI Bank, the largest private sector bank in the country, has reported a strong improvement in its bottomline performance despite a fall in its topline for the June quarter. While bottomline has grown by 35% in 1QFY04, topline growth has been negative at 6%. Significant rise in other income and savings in interest expenses have helped the strong growth in bottomline.

    (Rs m) 1QFY03 1QFY04 Change
    Income from Operations 23,956 22,561 -5.8%
    Other Income 4,375 6,438 47.1%
    Interest Expenses 20,595 18,402 -10.6%
    Net interest income 3,361 4,159 23.7%
    Other Expenses 4,426 5,939 34.2%
    Operating Profit (1,065) (1,781) 67.2%
    Operating Profit Margin (%) -4.4% -7.9%  
    Provisions and Contingencies 495 850 71.9%
    Profit before Tax 2,816 3,808 35.2%
    Extra-ordinary income/(expense) - -  
    Tax 287 406 41.5%
    Profit after Tax/(Loss) 2,529 3,402 34.5%
    Net Profit Margin (%) 10.6% 15.1%  
    No. of Shares (m) 612.6 612.6  
    Diluted Earnings per share* (Rs) 16.5 22.2  
    P/E Ratio (x)   7.2  
    *(annualised)      

    ICICI Bank's interest income from advances have shown a growth of 7% in the June quarter (we have assumed a 6% fall in topline for FY04 in our estimates). The bank has been very aggressive in the retail segment and this may be the reason for the growth in advances income. Retail assets have grown by 18% in the June quarter. They now make up nearly 35% of all advances by the bank. While income from advances has grown strongly, investment income has fallen significantly thus leading to a fall in its topline. This seems to be the result of the bank's efforts to lend aggressively, that has resulted in lower investments by the bank.

    While the topline performance is unimpiressive, what has impressed however is the fact that the bank has been able to further improve upon its Net Interest Margins (NIM) in the June quarter (from 1.2% to 1.7%). We have estimated a NIM of 1.7% in our FY04 estimates for the bank. This has been primarily achieved by repaying erstwhile ICICI's high interest borrowings as well as focusing on the retail segment for relatively cheaper capital in the form of deposits. Net interest income has risen by a healthy 24% due to the above mentioned initiatives.

    Operating expenses of the bank have shown a sharp rise in the June quarter. This may have been due to ICICI Bank's continuing initiative to increase its reach by setting up new branches and ATMs. Operating margins have also fallen due to this reason.

    Despite fall in topline, the bank has been able to improve its bottomline performance significantly in part due to strong rise in other income. ICICI Bank's other income has risen mainly on account of booking of profits in its G-Sec as well as equities portfolio. Bottomline growth has been strong despite strong rise in provisioning. However despite the rise in provisioning, net NPA to advances ratio still stands at 4.9%, same as that for FY03, and one of the highest in the industry. This indicates that the bank may be facing increased delinquencies in its loan portfolio. High NPA levels continue to be a concern for the bank. We have arrived at a net NPA to advances ratio of 3.5% for the bank in FY04.

    At Rs 160, the stock is trading at a P/E ratio of 7x its annualised 1QFY04 earnings. ICICI Bank's performance in the June quarter indicates that it is doing well enough on its restructuring initiatives post the merger with its parent. However NPAs continue to be the only area which is not being tackled effectively by the bank. While the stock has run up in the recent past on expectations of good results, non performance on the NPA front could dampen investor spirits (regarding the stock) going forward.

     

     

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