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ICICI Bank: Worries beyond costs - Views on News from Equitymaster
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ICICI Bank: Worries beyond costs
Jul 26, 2008

Performance summary
  • Interest income grows marginally by 4.3% YoY in 1QFY09.

  • Net interest margin improves to 2.4% due to lower interest costs.

  • Operating costs drop marginally with cost to income ratio at 53% in 1QFY09 (56% in 1QFY08).

  • Capital adequacy ratio comfortable at 13.4% in 1QFY09.

  • Net NPAs higher at 1.8% of advances from 1.4% in 1QFY08 and 1.6% in 4QFY08.

  • Despite cost curtailment bottomline drops by 6.1% YoY in 1QFY09 due to treasury losses and higher provisioning.

Standalone numbers
Rs (m) 1QFY08 1QFY09 Change
Interest earned 75,661 78,918 4.3%
Interest expense 58,519 58,021 -0.9%
Net Interest Income 17,142 20,897 21.9%
Net interest margin (%) 1.9% 2.4%  
Other Income 17,153 15,382 -10.3%
Other Expense 19,053 19,139 0.5%
Provisions and contingencies 5,523 7,925 43.5%
Profit before tax 9,719 9,215 -5.2%
Tax 1,969 1,935 -1.7%
Profit after tax/ (loss) 7,750 7,280 -6.1%
Net profit margin (%) 10.2% 9.2%
No. of shares (m) 899.3 1,113.1
Book value per share (Rs)* 425.8
P/BV (x) 1.5
* Book value as on 30th June 2008

What has driven performance in 1QFY09?
  • Shying away from credit: ICICI Bank continued to bear the pains of higher delinquencies in retail loans and shied away from growing its advance book in line with the industry in 1QFY09. This was also intended to avoid raising high cost capital and conserve its capital base (CAR) by not having to provide higher for risky retail assets. The banks consolidated advances (including ICICI Home Finance and its international branches) grew by 20% YoY. The bank has not divulged the details of its advance portfolio at the end of 1QFY08. We have assumed advance growth of 14% YoY in FY09.

    Low cost deposits (CASA) comprised 27.6% of ICICI Bank’s total deposits at the end of 1QFY09. In addition international funds were sourced at relatively lower costs (LIBOR plus 0.9%) than domestic funds. These helped the bank to improve its NIMs to 2.4% (1.9% in 1QFY08).

    Cost in focus…
    (Rs m) 1QFY08 % of total 1QFY09 % of total Change
    Advances 1,982,770   2,241,460   13.0%
    Total deposits 2,307,880   2,344,610   1.6%
    CASA 516,965 22.4% 647,112 27.6% 25.2%
    Term deposits 1,790,915 77.6% 1,697,498 72.4% -5.2%
    Credit /Deposit 85.9%   95.6%    

  • ‘Absolute’ slippages: The pressure of undercutting its peers by offering very competitive interest rates, especially in retail loans seems to have shown its colours as the gross NPAs in absolute terms has nearly doubled in ICICI Bank’s books. The bank’s net NPAs (as percentage of total advances) increased to 1.8% in 1QFY09, from 1.4% in 1QFY08. The level of incremental delinquencies (slippages in asset quality) has been sequentially increasing every quarter for the past five quarters. Also, the bank clarified that 75% of the retail NPAs were from non-collateralised assets such as personal loans and credit cards. Retail NPAs were 73% of the bank’s gross NPAs in FY08.

  • Treasury pain: Fee income (constituting 54.7% of ICICI Bank’s total income) grew by a robust 37% YoY during the 12 months ended 1QFY09. Of this, 55% was derived from retail assets while the remaining 45% was from corporate and international assets. However, sharp increase in interest rates and adverse market conditions during the first quarter of FY09 had a negative impact of Rs 5.9 bn on the bank’s trading portfolio and Statutory Liquidity Ratio (SLR) securities portfolio, which led to a 10% YoY drop in other income.

  • Subsidiaries: ICICI Bank’s life and non-life insurance businesses increased their market share to 13.8% and 13.3% respectively. The life insurance business had a NBAP (new business achieved profit) margin of 19.1% while the general insurance business grew its premium by 21% YoY in 1QFY09 (profits not divulged). The bank has no plans of listing these subsidiaries in the near term.

What to expect?
At the current price of Rs 657, the stock is trading at 1.2 times our estimated FY11 adjusted book value. The bank has deferred its plans to list its security broking subsidiary that was earlier planned for 1HFY09. There is also no clarity on the position of the bank’s derivative portfolio. Although ICICI Bank’s growth prospects across product categories especially international assets appear enthusing, our concerns with respect to the bank’s increasing delinquencies remain undiluted. 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. We have revised our estimates and target price for the bank downwards due to the underperformance with regard to advance growth and asset quality.

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