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ICICI Bank: Retail and more… - Views on News from Equitymaster
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ICICI Bank: Retail and more…
Aug 2, 2005

Performance summary:
Unabated growth in retail assets coupled with better margins has helped ICICI Bank register 23% YoY growth in its bottomline for 1QFY06. The bank also continued to witness strong growth in fee income at the same time containing its operational overheads. Better asset quality and well-hedged treasury portfolio places the bank on relatively comfortable grounds as compared to its peers.

Rs (m) 1QFY05 1QFY06 Change
Income from operations 21,957 29,977 36.5%
Other Income 6,577 10,905 65.8%
Interest Expense 15,652 21,465 37.1%
Net Interest Income 6,305 8,512 35.0%
Net interest margin (%) 2.3% 2.4%  
Other Expense 7,324 9,709 32.6%
Provisions and contingencies 458 2,978 550.2%
Profit before tax 5,100 6,730 32.0%
Tax 793 1,429 80.2%
Profit after tax/ (loss) 4,307 5,301 23.1%
Net profit margin (%) 14.4% 24.1%  
No. of shares (m) 733.8 739.0  
Diluted earnings per share (Rs)* 23.5 28.7  
P/E (x)   18.7  
* (annualised)      

Encashing retail
ICICI Bank is the second largest bank in the country after SBI in terms of asset size. ICICI Bank also prides itself as the first universal bank in the country due to the fact that it provides a wide variety of services. At the end of 1QFY06, the bank had a franchise of over 1,790 ATMs and 573 branches spread across the country. Retail assets constituted 63% of advances and 60% of the bank’s customer assets. The bank is focusing on loan origination in the retail and agriculture segments and on non-fund based products and services, as well as capitalising on opportunities presented by the domestic and international expansion of Indian companies.

What has driven performance in 1QFY06?
Benign margins:  ICICI Bank’s dedicated focus on retail expansion seems to be finally bearing fruit as this has not only given the bank the distinction of the largest retail asset base in the country but has also given it a competitive edge when it comes to funding. Infact, the bank seems to be enjoying the dual benefits of shedding of the erstwhile ICICI’s high cost borrowings (comprising 42% of total borrowings at the end of 1QFY06) and ability to garner sufficient low cost deposits to fund its assets growth. During 1QFY06, the bank witnessed a growth of 70% YoY in its deposit base against the average industry growth rate of 15%. At the same time, the advance book expanded by an impressive 49% YoY with the retail segment growing by 70% YoY. Although the bank has not divulged the details of cost of deposits and yield on advances, we reckon that the same is proving to be beneficial to the bank, which has seen its net interest margins (NIMs) improve to 2.4% (from 2.3% in 1QFY05) despite raising additional equity during FY05.

  1QFY05 % of total 1QFY06 % of total Change
Advances 658,250   979,090   48.7%
Retail 365,830 55.6% 620,630 63.4% 69.6%
Corporate 292,420 44.4% 358,460 36.6% 22.6%
Investments 413,140   577,090   39.7%
Deposits 667,800   1,137,780   70.4%
Borrowings 380,220   423,340   11.3%
ICICI borrowings 265,800 69.9% 177,490 41.9% -33.2%
Other borrowings 114,420 30.1% 245,850 58.1% 114.9%

Strong fee growth:  It is not just the growth in net interest income but also the 57% YoY growth in fee income and 97% growth in treasury income that helped the bank post strong growth in bottomline for 1QFY06. Fee income (constituting 73% of the bank’s other income) has been a significant contributor to the bank’ profitability over the past few quarters. It must also be noted that the bank stands well hedged in terms of its treasury portfolio of which 85% is in the HTM (held to maturity) basket besides having lower duration investments in the AFS (available for sale) category (which needs to be marked to market).

Overheads beckon caution:  Although the bank’s cost to income ratio has fallen to 41% in the June 2005 quarter from 47% in 1QFY05, the operating overheads continue to grow at exponential rates (33% YoY). This is a matter of concern for the bank’s profit margins as such high overheads may be detrimental in wake of lower interest margins going forward. Also, the same are significantly higher than that of its peers in the private banking space.

Quality improves:  The bank has continued to be proactive in safeguarding its asset quality by bringing down the net NPA to advance ratio to 2% from 2.7% at the end of 1QFY05. Retail net NPA ratio also stood at 0.5% down from 0.6% earlier. The bank has net restructured assets of Rs 62 bn at the end of 1QFY06. However, despite lower delinquencies, the provisioning cover continues to decline at a faster rate as compared to its net NPAs, which calls for additional risk mitigation.

Capital crunch on the anvil:  The bank is expected to witness capital crunch going forward despite having raised equity in FY05. Its CAR (capital adequacy ratio) has declined to 12% in 1QFY06 against 15% in 1QFY05. This is also because it has had to assign risk weightage of 75% on retail mortgage and 125% on other loans, commercial real estate and capital market exposure. Its CAR would have been 13.4% at the earlier risk weightage of 50% for retail home loans and 100% for other consumer loans, commercial real estate and capital market exposure. The bank may thus have to go in for tier II borrowings to fulfill its CAR requirements.

What to expect?
ICICI Bank has built on its existing presence in various geographies as well as entered new markets during 1QFY06. During this period, the bank acquired the entire paid-up capital of Investitsionno-Kreditny Bank (IKB), a Russian bank, and plans to continue on its inorganic growth strategy during the current fiscal. The bank is also focusing on rural banking and technology initiatives that are expected to give it an edge going forward.

At the current price of Rs 536, the bank is trading 3.6 times FY05 adjusted book value and 2.8 times our estimated FY07 adjusted book value. We had given a SELL on the stock in July 2005. Besides the current valuations being stretched, we believe that most of the positives (in terms of growth, improvement in margins and asset quality) have been well factored into the current stock price. The possibility of an upside hereon, in our opinion, is therefore very limited. Also, the bank’s life insurance subsidiary continues to be drag to its financials and the same is likely to continue in the medium term. The bank, thus, does not feature favourably on our risk return matrix.

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