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ICICI Bank: Negligible corporate lending - Views on News from Equitymaster
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ICICI Bank: Negligible corporate lending
Aug 6, 2015

ICICI Bank declared the results for the first quarter of financial year 2015-16 (1QFY16). The bank has reported 14% YoY growth in net interest income and 12% YoY growth in net profits for 1QFY16.Here is our analysis of the results.

Performance summary
  • Net interest income grows by 14% in 1QFY16 on the back of 14% YoY growth in advances while net interest margin (NIM) improves to 3.5% from 3.4% in 1QFY15.
  • Cost to income ratio remains stable at 38% in 1QFY16. This is the lowest amongst large private sector banks.
  • Capital adequacy ratio healthy at 16.3% at the end of June 2015.
  • Net NPAs rise to 1.4% of advances in 1QFY16, from 0.9% in 1QFY15. Restructured loans continued to remain 2.8% of advances in June 2015 as was the case in June 2014.
  • Bottomline grows by 12% YoY in 1QFY16 largely due to higher interest margins and cost efficiency.

Rs (m) 1QFY15 1QFY16 Change
Interest income 117,669 128,125 8.9%
Interest Expense 72,750 76,975 5.8%
Net Interest Income 44,919 51,150 13.9%
NIM (%) 3.4% 3.5%  
Other Income 28,498 29,898 4.9%
Other Expense 28,249 30,671 8.6%
Provisions and contingencies 7,260 9,553 31.6%
Profit before tax 37,908 40,824 7.7%
Tax 11,353 11,062 -2.6%
Profit after tax / (loss) 26,555 29,762 12.1%
Net profit margin (%) 22.6% 23.2%  
No. of shares (m)   5,787.5  
Book value per share (Rs)*   144.0  
P/BV (x)   2.2  
* (Standalone book value as on 30th June 2015)

What has driven performance in 1QFY16?
  • With a conservative stance on asset quality, given the rise in NPAs over the past 12 months, ICICI Bank chose to keep its corporate loans book stagnant on YoY basis. The growth in advances too lagged that of private sector peers, even as the retail loan book saw a healthy traction. The deposit book too grew on the back of higher CASA proportion and shielded margins despite pressure on yields.

  • Since 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
      1QFY15 % of total 1QFY16 % of total Change
    Advances 3,960,230   4,523,140   14.2%
    Retail 1,548,723 36.2% 1,935,904 42.8% 25.0%
    Corporate 1,291,035 32.6% 1,298,141 28.7% 0.6%
    SME 182,171 4.6% 194,495 4.3% 6.8%
    International 1,053,421 26.6% 1,094,600 24.2% 3.9%
    Deposits 3,357,670   3,678,770   9.6%
    CASA 1,429,391 43.0% 1,643,800 44.1% 15.0%
    Term deposits 1,928,279 57.0% 2,034,970 55.9% 5.5%

  • Asset quality woes, particularly in terms of loan restructuring, continued to haunt ICICI Bank in 1QFY16. The gross NPAs (non performing assets) in absolute terms have gone up by 45% over the past 12 months. Net NPAs rose to 1.4% of advances in 1QFY16, from 0.9% in 1QFY15. The gross NPAs in retail loan portfolio stood at 2% of advances as against 2.3% in June 2014. The NPA coverage ratio stood at 58.2%, which is very low according to us.

  • Fee income (up 8% YoY) constituted 30% of ICICI Bank's total income in 1QFY16 as against 33% in 1QFY15.

  • Lower the direct marketing costs helped ICICI Bank bring down the cost to income ratio to 38%. The return on equity however remained subdued at 15% at the end of June 2015.
What to expect?
At the current price of Rs 311, the stock is trading at a multiple of 1.7 times our estimated FY17 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 are in the process of updating our estimates for ICICI Bank and will soon revise the target price. Until then, we recommend investors to not buy the stock at current valuations.

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