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ICICI Bank: Why size no longer matters - Views on News from Equitymaster
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ICICI Bank: Why size no longer matters
Jul 27, 2009

Performance summary
  • Interest income drops by 10% YoY in 1QFY010; advances drop by 12% YoY. Net interest margin remains stable at 2.4% due to lower deposit costs.
  • Operating costs drop with cost to income ratio at 38% in 1QFY10 (53% in 1QFY09).
  • Capital adequacy ratio healthy at 17.4% at the end of 1QFY10. Off-balance sheet items are 22% of total risk weighted assets.
  • Net NPAs higher at 2.1% of advances from 1.7% in 1QFY09.
  • Due to cost curtailment and higher other income, bottomline grows by nearly 21% YoY in 1QFY10.


Standalone numbers
Rs (m) 1QFY09 1QFY10 Change
Interest income 78,918 71,334 -9.6%
Interest Expense 58,020 51,481 -11.3%
Net Interest Income 20,898 19,853 -5.0%
Net interest margin (%) 2.3% 2.4%  
Other Income 15,381 20,898 35.9%
Other Expense 19,139 15,460 -19.2%
Provisions and contingencies 7,925 13,236 67.0%
Profit before tax 9,215 12,055 30.8%
Tax 1,935 3,272 69.1%
Profit after tax/ (loss) 7,280 8,783 20.6%
Net profit margin (%) 9.2% 12.3%  
No. of shares (m)   1,113.3  
Book value per share (Rs)*   441.9  
P/BV (x)   1.7  
* Book value as on 30th June 2009

What has driven performance in 1QFY10?
  • Continuing its focus on risk containment as also in an attempt to avoid incremental delinquencies and conserve capital, ICICI Bank chose to shrink its balance sheet in the first quarter of FY10. The bank which had earlier targeted growth primarily through larger balance sheet size has reversed its strategy in the past three quarters. Despite sufficient liquidity in the system, ICICI Bank reduced its loan book by 11% YoY in 1QFY10. Of this, the largest exposure was shed in the retail portfolio that is most susceptible to delinquency risks. Domestic retail and corporate loans together comprised 62% of the bank’s asset book in 1QFY10 as against 73% at the end of 1QFY09. Home loans and auto loans comprised 56% and 27% respectively of the retail loan portfolio.

  • Although the bank lost nearly 10% of its deposits during this period, low cost deposits (CASA – current and savings accounts) comprised a higher 30% of ICICI Bank’s total deposits at the end of 1QFY10. In case of borrowings, overseas borrowings comprised 60% of the bank’s total borrowings at the end of 1QFY10, as was the case at the end of 1QFY09. We have estimated an overall loan growth of 6% YoY in FY10 and may have to revise our estimates downwards if the bank continues to reduce its balance sheet size in the subsequent quarters.

    Shrinking balance sheet…
    (Rs m) 1QFY09 % of total 1QFY10 % of total Change
    Advances 224,146   198,102   -11.6%
    Retail 132,919 59.3% 97,070 49.0% -27.0%
    Corporate 30,260 13.5% 25,753 13.0% -14.9%
    Rural 16,363 7.3% 15,848 8.0% -3.1%
    SME 4,483 2.0% 7,924 4.0% 76.8%
    International 40,122 11.3% 51,507 26.0% 28.4%
               
    Total deposits 234,461   210,236   -10.3%
    CASA 64,685 27.6% 63,977 30.4% -1.1%
    Term deposits 169,776 69.6% 146,259 72.4% -13.9%
    Credit /Deposit 95.6%   94.2%    

  • The gross NPAs (non performing assets) in absolute terms have nearly doubled in ICICI Bank’s books in the past 12 months. Its net NPAs (as percentage of total advances) increased to 2.1% in 1QFY10, from 1.7% in 1QFY09. The level of incremental delinquencies (slippages in asset quality) has been sequentially increasing every quarter for the past six quarters. ICICI Bank has restructured assets worth Rs 41 bn until the end of 1QFY10, totally comprising 2% of its advances.

  • Fee income (constituting 33% of ICICI Bank’s total income in 1QFY10 from 55% in 1QFY09) fell by 33% YoY during the quarter. The 36% YoY growth in other income can be largely attributed to growth in treasury income.

  • ICICI Bank has received licenses to set up additional 580 branches over the next few quarters. Although the bank has halved its direct marketing costs, cost of operating the incremental branches may increase the cost to income ratio from the current levels.

What to expect?
At the current price of Rs 767, the stock is trading at a multiple of 1.7 times our estimated FY12 standalone adjusted book value (including ICICI Home Finance). While it is encouraging to note that ICICI Bank is getting very candid about the disclosure of off-balance sheet items and exposure to international assets, the potential risks to the same cannot be sidelined. Given the size of the bank’s balance sheet, its conscious strategy of withholding any further growth in the same for a couple of quarters is however not a matter of serious concern. We believe that at the current price, valuation of the stock appears expensive and as such investors need to practice caution.

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