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ICICI Bank: Conference call excerpts - Views on News from Equitymaster
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ICICI Bank: Conference call excerpts
Sep 21, 2005

Manifesting its stronghold in the retail banking business, ICICI Bank continues to spearhead growth both on the retail assets and liabilities side. The bank also had a total retail customer base of 13 m as against SBI’s 8 m, at the end of FY05. In the analysts’ conference call, the management gave further updates on what will be the major drivers of the bank’s revenues and margins going forward. Following are key excerpts of the same. Deposits: ICICI Bank achieved a deposit growth of 70% YoY in 1QFY06 as against the sector growth of 15%. With this, the bank had 26% of the market share in incremental deposits. However, the ratio of wholesale corporate deposits to retail deposits (55:45) continues to be skewed towards the corporate segment, thus signifying higher interest liability. With rise in interest rates, the high cost deposit may yield pressure on the bank’s margins albeit the fact that the bank is envisaging some re-pricing of the erstwhile ICICI deposits (cost 10.5%), which may provide a cushion.

Retail assets: In the retail assets segment (63% of the bank’s advances in 1QFY06), ICICI Bank continues to have a major concentration in the mortgage portfolio (51% of advances) and also enjoys the highest market share (approximately 28%) surpassing that of HDFC (market share 21% in FY05). At the end of 1QFY06, the bank had total yield on advances of 8.3% and total cost of funds of 5.9% thus giving it a net spread of 2.4%.

The bank has raised interest rates on the entire (i.e. existing as well as incremental) floating rate home loan portfolio (of about Rs 250 bn) and incremental auto and commercial loan portfolio by 50 basis points in 2QFY06. The total rise in interest rates on mortgages has thus been 75 basis points over 1QFY05. This is expected to further aid the bank’s yields going forward. However, it needs to be noted that the bank has witnessed a fall in the proportion of floating loans to total loans from 25% in 1QFY05 to 14% in 1QFY06. Thus, going forward, the scope for passing on the rise in interest rates on the outstanding assets remains limited to that extent.

Other income: The proportion of fee income to total income shot up from 21% in FY04 to 34% in FY05. The same remained buoyant in 1QFY06 with the fee income growing at 57% YoY. Of this, 62% was contributed by the retail business, 30% by corporate business and 8% by international business. Also, it must be noted that although the bank’s treasury income grew by 97% in 1QFY06, 51% of the same was through gains in equity investments and thus may not be sustainable in the longer term. However, given that 85% of the bank’s treasury portfolio is in the HTM basket, the risk of treasury losses remains mitigated.

Also, the bank made significant gains through the securitisation deals (of Rs 25 bn) of its home loan and auto loan portfolios and the income garnered through the same accounted for 17% of the of the net interest income (NII) in FY05.

International business: The bank has built on its existing presence in various geographies as well as entered new markets during 1QFY06. During this period, the bank acquired Investitsionno-Kreditny Bank (IKB), a Russian bank with total assets of US$ 4.4 m and plans to continue on its inorganic growth strategy during the current fiscal. The bank has NRI customer base of over 0.4 m and has witnessed a steady growth in the contribution of international business over the years. In terms of fee-based income, the international branches contributed about 8%, while on the loans side total loans contributed by the international branches were 5% (of advances) in FY05.

NPAs: Although the bank saw a dip in its net NPA to advance ratio to 2% in 1QFY06 (2.7% in 1QFY05), it continued to carry restructured loans in its books to the tune of Rs 620 bn in its books. Also, while the retail NPAs dropped to 0.5% of advances in 1QFY06 (against 0.7% in 1QFY05), slippages on the credit card (net NPA 7%) and two-wheeler portfolios (net NPA 2%) continue to weigh heavy on the bank’s books.

What to expect?
ICICI Bank will continue to reap the benefits of replacement of its high cost debt on its margins in FY06. Thus, the impact of rise in interest rates will be lesser visible on this bank as compared to its peers. Also, ICICI Bank is expected to auction Rs 15 bn worth of NPAs in 2QFY06 that will bring down its NPAs to 1% of advances and further enhance its adjusted book value.

At the current price of Rs 580, the bank is trading at a rich valuation of 2.5 times our estimated FY08 adjusted book value. While we believe that the bank is well positioned to capitalise on the latent opportunities in terms of growth, improvement in margins and asset quality, the stretched valuations call for caution on the part of the investors.

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