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ICICI Bank: Growth challenges surface - Views on News from Equitymaster

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ICICI Bank: Growth challenges surface
Aug 1, 2013

ICICI Bank declared the results for the first quarter of financial year 2013-14 (1QFY14). The bank has reported 20% YoY growth in net interest income and 25% YoY growth in net profits for 1QFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 20% in 1QFY14 on the back of 12% YoY in advances while net interest margin (NIM) improved to 3.3% from 3.0% in 1QFY13.
  • Cost to income ratio reduces to 39.4% from 41.8% in 1QFY13.
  • Capital adequacy ratio healthy at 17.0% at the end of June 2013.
  • Net NPAs rise to 0.69% of advances in 1QFY14, from 0.61% in 1QFY13.
  • Bottomline grows by 25% YoY in 1QFY14 largely due to higher interest margins and cost efficiency.

Standalone financials
Rs (m) 1QFY13 1QFY14 Change
Interest income 95,456 104,206 9.2%
Interest Expense 63,527 66,002 3.9%
Net Interest Income 31,929 38,204 19.7%
NIM (%) 3.0% 3.3%  
Other Income 18,799 24,842 32.1%
Other Expense 21,235 24,906 17.3%
Provisions and contingencies 4,658 5,931 27.3%
Profit before tax 24,835 32,209 29.7%
Tax 6,684 9,467 41.6%
Profit after tax / (loss) 18,151 22,742 25.3%
Net profit margin (%) 19.0% 21.8%  
No. of shares (m)   1,154.1  
Book value per share (Rs)*   607.2  
P/BV (x)   1.5  
* (Consolidated book value as on 30th June 2013)

What has driven performance in 1QFY14?
  • As slower growth rates gripped the entire banking sector over the past quarter, large entities like ICICI Bank particularly felt the pinch. The bank has also intentionally tried to keep balance sheet growth muted over the past couple of quarters. The motives were both capital conservation as well check on asset quality. In terms of loan growth and deposit growth, ICICI Bank’s numbers have come in a tad lower than the growth rate posted by most of its private sector peers. However, given the bank’s balance sheet size the cautious undertone has certainly paid off by way of better and more stable net interest margins. The bank’s NIMs at 3.1% at the end of June quarter is not just higher than 3% in 1QFY13. It has also managed to retain margins at the same level for the past 4 quarters.

    Although, ICICI Bank seems to have kept a close eye on CASA deposits, the proportion of the same remained flattish. The bank’s deposits grew by just 8.7% YoY in 1QFY14, while there was a nominal 3.9% YoY growth in the term deposit base.

    On the assets side, ICICI Bank has kept the proportion of retail advances in check. However most of the incremental lending was to the large corporate segment. This ensured that the bank kept its net interest margins stable without hurting asset quality. Going forward, the bank may see some NPA risks emanating from its exposure to the power sector, particularly SEBs (state electricity boards). The upside in margins (NIMs) may be capped with a possibility of rise in interest costs.

    Loan growth concentrated in corporate segment
      1QFY13 % of total 1QFY14 % of total Change
    Advances 2,684,300   3,013,700   12.3%
    Retail 963,664 35.9% 1,084,932 36.0% 12.6%
    Corporate 816,027 30.4% 979,453 32.5% 20.0%
    SME 153,005 5.7% 138,630 4.6% -9.4%
    International 751,604 28.0% 810,685 26.9% 7.9%
    Deposits 2,677,940   2,911,850   8.7%
    CASA 1,086,770 40.6% 1,258,340 43.2% 15.8%
    Term deposits 1,591,170 59.4% 1,653,510 56.8% 3.9%

  • The bank had 0.6% of its investments in security receipts of asset reconstruction companies and credit derivative exposure (on and off balance sheet) at the end of June 2013.

  • The gross NPAs (non performing assets) in absolute terms have remained stable over the past 12 months. The gross and net NPAs stood at 3.3% and 0.7% of advances respectively at the end of June 2013. The NPAs in retail loan portfolio stood at 5% of advances. The NPA coverage ratio stood at 75.4%. The restructured loans comprised 2% of ICICI’s overall loan book at the end of June 2013. Worth noting that the bank also sold some of its exposure to Kingfisher Airlines to an arm of Srei Infra Finance in 1HFY12.

  • Fee income constituted 32% of ICICI Bank’s total income in 1QFY14 as against 38.7% in 1QFY13. The 32% YoY growth in other income was boosted by dividend from subsidiaries.

  • Lower the direct marketing costs helped ICICI Bank bring down the cost to income ratio to 39.4% in 1QFY14 from 41.8% in 1QFY13.

What to expect?

At the current price of Rs 909, the stock is trading at a multiple of 1.3 times our estimated FY15 consolidated adjusted book value (excluding insurance businesses). The bank’s performance has been in line with our estimates with regard to its margins and asset quality. However, the growth estimates remain under review. While NPA risks cannot be ruled out, we do not see the same significantly impacting the bank’s long term fundamentals.

Worth noting that we value ICICI Bank at a relative discount to private sector peers due the bank’s past history of risky operations and managerial decision making. The current valuations of the bank warrant caution. We maintain a Hold view on the stock with a target price of Rs 1,363 from an FY16 perspective.

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