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ICICI Bank: Cost efficiency yet to filter in

Jul 29, 2011

ICICI Bank declared the results for the first quarter of financial year 2011-12 (1QFY12). The bank has reported 21% YoY growth in net interest income and 30% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary
  • Interest income grows by 31% in 1QFY12 on the back of 20% YoY in advances while net interest margin (NIM) improves due to higher CASA proportion.
  • Operating costs move up with cost to income ratio at 45% in 1QFY12 (40% in 1QFY11).
  • Capital adequacy ratio healthy at 19.6% at the end of June 2011.
  • Net NPAs improve to 0.9% of advances in 1QFY12 (1.6% in 1QFY11).
  • Other income falls by 2% due to lower treasury gains and stagnant fee to other income ratio.
  • Bottomline grows by 30% YoY in 1QFY12 due to write back of provisioning. Provision coverage ratio at 77% in June 2011, in line with RBI mandate.

Rs (m) 1QFY11 1QFY12 Change
Interest income 58,125 76,185 31.1%
Interest Expense 38,215 52,076 36.3%
Net Interest Income 19,910 24,109 21.1%
NIM (%) 2.5% 2.6%  
Other Income 16,805 16,428 -2.2%
Other Expense 14,835 18,197 22.7%
Provisions and contingencies 7,978 4,538 -43.1%
Profit before tax 13,902 17,802 28.1%
Tax 3,642 4,479 23.0%
Profit after tax / (loss) 10,260 13,323 29.9%
Net profit margin (%) 17.7% 17.5%  
No. of shares (m)   1,152.1  
Book value per share (Rs)*   490.1  
P/BV (x)   2.1  
* (Book value as on 30th June 2011)

What has driven performance in 1QFY12?
  • ICICI Bank started the fiscal on a conservative note underperforming the sector average in terms of balance sheet growth. However, what is enthusing is that the bank kept a close eye on CASA deposits and net interest margins. ICICI Bank's advances grew by 20% YoY in 1QFY12. This was backed by 15% YoY growth in the deposit base as well. Appreciably the proportion of low cost deposits (CASA) went up from 42% in 1QFY11 to 45% in 1QFY12. On the assets side, ICICI Bank has arrested the fall in retail advances despite keeping the proportion lower. However most of the incremental lending was to the mid and large corporate segment. This ensured that the bank kept its net interest margins stable without hurting asset quality.

    Concentration on Corporate & SME
      1QFY11 % of total 1QFY12 % of total Change
    Advances 1,843,780   2,206,930   19.7%
    Agriculture 165,940 9.0% 187,589 8.5% 13.0%
    Retail 755,950 41.0% 827,599 37.5% 9.5%
    Corporate 368,756 20.0% 523,042 23.7% 41.8%
    SME 73,751 4.0% 110,347 5.0% 49.6%
    International 479,383 26.0% 558,353 25.3% 16.5%
    Deposits 2,009,130   2,306,780   14.8%
    CASA 846,180 41.7% 966,350 45.1% 14.2%
    Term deposits 1,162,950 58.3%  1,340,430 54.9% 15.3%

  • The bank had 2% of its investments in security receipts of asset reconstruction companies and 1.5% of its investments in credit derivative exposure (on and off balance sheet) at the end of June 2011.

  • The gross NPAs (non performing assets) in absolute terms have remained stable over the past 12 months. The gross and net NPAs stood at 4.6% and 0.9% of advances respectively at the end of June 2011. The NPA coverage ratio stood at 77%, above the RBI mandate of 70%.

  • Fee income constituted 39% of ICICI Bank's total income in 1QFY12 same as in 1QFY11. The 2% YoY fall in other income was primarily due to fall in treasury income.

  • Although ICICI Bank has halved the direct marketing costs, the cost of operating the incremental branches increased the cost to income ratio from 40% to 45% in 1QFY12. The bank plans to hire 5,000 employees during FY12.

What to expect?
At the current price of Rs 1,039, the stock is trading at a multiple of 1.7 times our estimated FY14 standalone adjusted book value (including ICICI Home Finance). While the bank’s margins and other income potential do have substantial upside, we continue to believe that the current valuations of the bank leave very little on the table for investors. Having said that, ICICI Bank's CAR (capital adequacy ratio) of 19.6% at the end of June 2011 was amongst the highest in the sector. This gives the bank sufficient headroom for growth even after complying with the Basel II norms. Also the bank will not need to raise additional Tier II capital in a rising interest rate scenario in the medium term.

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