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ICICI Bank: Asset quality continues to slip

Aug 1, 2014 | Updated on Oct 30, 2019

ICICI Bank declared the results for the first quarter of financial year 2014-15 (1QFY15). The bank has reported 18% YoY growth in net interest income and 17% YoY growth in net profits for 1QFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 18% in 1QFY15 on the back of 15% YoY growth in advances while net interest margin (NIM) improved to 3.4% from 3.3% in 1QFY14.
  • Cost to income ratio reduces to 38% from 40% in 1QFY14.
  • Capital adequacy ratio healthy at 17.5% at the end of June 2014.
  • Net NPAs rise to 0.9% of advances in 1QFY15, from 0.7% in 1QFY14. Restructured loans (up 90% YoY) at 3.2% of advances in June 2014 as against 2.0% in June 2013.
  • Bottomline grows by 17% YoY in 1QFY15 largely due to higher interest margins and cost efficiency.
Standalone financials
Rs (m) 1QFY14 1QFY15 Change
Interest income 104,206 117,669 12.9%
Interest Expense 66,002 72,750 10.2%
Net Interest Income 38,204 44,919 17.6%
NIM (%) 3.3% 3.4%  
Other Income 24,842 28,498 14.7%
Other Expense 24,906 28,249 13.4%
Provisions and contingencies 5,931 7,260 22.4%
Profit before tax 32,209 37,908 17.7%
Tax 9,467 11,353 19.9%
Profit after tax / (loss) 22,742 26,555 16.8%
Net profit margin (%) 21.8% 22.6%  
No. of shares (m)   1,156.2  
Book value per share (Rs)*   657.0  
P/BV (x)   2.2  
* (Standalone book value as on 30th June 2014)

What has driven performance in 1QFY15?

  • While its balance sheet growth is in sync with the industry average, asset quality woes continued to haunt ICICI Bank in the first quarter of FY15. The bank started FY15 with a good growth in retail credit. The improved CASA proportion also came handy and helped the bank improve its net interest margins at a time when most other are feeling the pressure of higher cost. The bank's NIMs at 3.4% at the end of June quarter is higher than 3.3% in June 2013. It has also managed to retain margins at the same level for the past 6 quarters. In terms of loan growth and deposit growth, ICICI Bank's numbers have come in line with the growth rate posted by most of its private sector peers.

    On the assets side, ICICI Bank has kept the proportion of corporate and SME loans in check. Hence most of the incremental lending was to the retail segment. There may be further upside in margins (NIMs) with a possibility of fall in interest costs.

    Loan growth focus shifts from corporate to retail
      1QFY14 % of total 1QFY15 % of total Change
    Advances 3,013,700   3,470,670   15.2%
    Retail 1,084,932 36.0% 1,374,385 39.6% 26.7%
    Corporate 979,453 32.5% 1,055,084 30.4% 7.7%
    SME 138,630 4.6% 152,709 4.4% 10.2%
    International 810,685 26.9% 888,492 25.6% 9.6%
    Deposits 2,911,850   3,357,670   15.3%
    CASA 1,258,340 43.2% 1,444,140 43.0% 14.8%
    Term deposits 1,653,510 56.8% 1,913,530 57.0% 15.7%

  • The bank had 0.5% of its investments in security receipts of asset reconstruction companies and credit derivative exposure (on and off balance sheet) at the end of June 2014.

  • The gross NPAs (non performing assets) in absolute terms have gone up by 10% over the past 12 months. However the steep rise in restructured loans signal possibility of spike in gross NPAs going forward. Net NPAs rose to 0.9% of advances in 1QFY15, from 0.7% in 1QFY14. The restructured loans (up 90% YoY) stood at 3.2% of advances in June 2014 as against 2% in June 2013. The gross NPAs in retail loan portfolio stood at 3.9% of advances as against 3.5% in June 2013. The NPA coverage ratio stood at 68.4%. Going forward, the bank remains vulnerable to NPA risks emanating from its exposure to the power sector, particularly SEBs (state electricity boards).

  • Fee income (up 12% YoY) constituted 32.6% of ICICI Bank's total income in 1QFY15 as against 34.7% in 1QFY14. In FY14, ICICI Bank fully recognized the mark-to-market provisions of Rs 2.8 bn on its investment portfolio. Also the bank transferred SLR securities to the tune of Rs 23 bn from AFS and HFT category to HTM category, thereby taking write down of Rs 100 m on account of the movement of bond yields.

  • Lower the direct marketing costs helped ICICI Bank bring down the cost to income ratio to 38% in 1QFY15 from 40% in 1QFY14. The return on equity however remained subdued at 14.6% at the end of 1QFY15.
What to expect?
At the current price of Rs 1,473, the stock is trading at a multiple of 1.9 times our estimated FY16 consolidated adjusted book value (excluding insurance businesses). The bank's performance has been in line with our estimates with regard to profit growth. However that is essentially due to lower costs and higher net interest margins. Moreover the slippage in asset quality remains high. While growth will continue at a muted pace in the near term, ICICI Bank is well capitalized to take advantage of lending opportunities as and when the economy picks up.

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. We recommended investors to Sell the stock and book profits in May 2014.

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Jun 25, 2021 03:35 PM


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