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ICICI Bank: Moderated pace - Views on News from Equitymaster
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ICICI Bank: Moderated pace
Oct 19, 2007

Performance Summary
  • Interest income grows by 37% YoY on the back of re-pricing of loans and lower cost of funds.

  • Operating costs remain high with cost to income ratio firming up to 51%.

  • Net interest margin remains stable at 2.2%.

  • Capital adequacy ratio comfortable at 16.8% post capital raising.

  • Net NPAs higher at 1.4% of advances from 1.3% in 1QFY08 and 0.9% in 2QFY07.

  • Bottomline grows by 33% YoY, aided by fee income growth, despite higher tax outgo.

Rs (m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Interest income 54,694 75,165 37.4% 105,081 150,826 43.5%
Interest Expense 38,924 57,305 47.2% 74,558 115,824 55.3%
Net Interest Income 15,770 17,860 13.3% 30,523 35,002 14.7%
Net interest margin (%)       2.1% 2.2%  
Other Income 15,701 20,719 32.0% 28,477 37,872 33.0%
Other Expense 15,352 19,708 28.4% 30,567 38,761 26.8%
Provisions and contingencies 7,093 6,445 -9.1% 11,921 11,968 0.4%
Profit before tax 9,026 12,426 37.7% 16,512 22,145 34.1%
Tax 1,475 2,401 62.8% 2,761 4,370 58.3%
Profit after tax/ (loss) 7,551 10,025 32.8% 13,751 17,775 29.3%
Net profit margin (%) 13.8% 13.3%   13.1% 11.8%  
No. of shares (m) 903.0 1,111.9   903.0 1,111.9  
Book value per share (Rs)*         402.5  
P/BV (x)         2.5  
* Book value as on 30th September 2007

Company background
ICICI Bank, in terms of asset size, is the second largest bank in the country after SBI. At the end of September 2007, the bank had a franchise of over 3,600 ATMs and 950 branches spread across the country. Retail assets constituted 63% of advances in 1HFY08. 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 2QFY08?
Shifting gears: Having realised the flipside of aggressive retail growth that offered lower margins and poorer asset quality in the past few quarters, ICICI Bank seems to have reworked its growth strategy and has been shifting its gears. Although retaining its market share across loan categories, ICICI Bank, in line with the sector, moderated its asset growth pace and clocked advance growth of 33% YoY in 1HFY08 against 45% YoY in 1HFY07. Further, while retail assets continued to enjoy dominance in the bank’s portfolio allocation (63% in 1HFY08), it were the bank’s SME and international assets that grew at a faster pace. While the SME portfolio grew by 57% YoY, total advances of the bank’s international branches, levered by its Indian corporate clientele overseas, reported a growth of 146% YoY. The growth in retail segment continues to help the bank in retaining the distinction of having the largest retail asset base in India. The bank, however, seems to have chosen to maintain a leaner exposure to the domestic corporate assets in this quarter due to the lower yields earned from this segment.

Seeking opportunity overseas…
(Rs m) 1HFY07 % of total 1HFY08 % of total Change
Advances 1,554,030   2,071,210   33.3%
Retail 1,015,612 63.6% 1,310,140 63.3% 29.0%
Corporate 241,228 18.5% 197,720 9.5% -18.0%
Rural 113,680 7.3% 141,360 6.8% 24.3%
SME 33,260 2.1% 52,050 2.5% 56.5%
International 150,250 10.6% 369,940 17.9% 146.2%
Deposits 1,894,990   2,283,070   20.5%
CASA 419,970 22.2% 578,270 25.3% 37.7%
Term deposits 1,475,020 77.8% 1,704,800 74.7% 15.6%
Credit /Deposit 82.0%   90.7%    

The bank outperformed the sectoral average advance growth during the quarter (23% YoY). Having said that, sustenance of margins seems to have been an issue in the past few quarters despite exposure to high risk weighted assets. ICICI Bank, having primarily relied on volumes rather than profitability was feeling the pinch of lower volumes and provisioning pressure on the high-risk assets, combined with lower spreads. The same had dented its net interest margin (NIM) in 1QFY08. However, the capital raising this quarter helped the bank pare its bulk deposits and reduce its cost of funds, thus aiding its NIMs (2.2%).

Overseas borrowings comprised 50% of total borrowings at the end of September 2007 against 31% in September 2006. On the deposits front, during 1HFY08, the bank witnessed a growth of 21% YoY in its deposit base against the average industry growth rate of 18%. The bank has 12% share of the system deposits. The proportion of low cost deposits also improved to 25%.

‘Retail’ slippages: ICICI Bank’s net NPAs (as percentage of total advances) increased to 1.4% in 1HFY08, from 0.9% in 1HFY07. This was seemingly a result of incremental delinquencies (slippages in asset quality) in the retail portfolio. Also, the bank clarified that 54% of the NPAs were from non-collateralised assets such as personal loans and credit cards. Importantly, despite the consistent rise in net NPAs over the past few quarters, the provisioning cover has continued to decline, which calls for additional risk mitigation. Retail NPAs were 60% of the bank’s total NPAs in 1HFY08. Net NPAs in the retail book were to the tune of 1.5%.

Fee growth cushions profitability: Fee income (constituting 40% of ICICI Bank’s total income) grew by a robust 25% YoY during 1HFY08. Of this, 55% of the fee income was derived from retail assets while the remaining 45% were from corporate and international assets. In fact, corporate and international assets have been a significant contributor to the bank’s profitability over the past few quarters and considering that, in the future, the bank is expected to successfully leverage its corporate client base overseas, it may well be able to sustain this strong growth rate in the future as well. The reason for the fall in fee to total income proportion can be attributed to the increased share of interest income from the overseas branches. International business comprised 22% of the bank’s consolidated banking assets in 1HFY08.

Capital comfort: ICICI Bank’s CAR (capital adequacy ratio) was 11.0% in 1QFY08. The bank successfully undertook a capital raising exercise of about Rs 200 bn (US$ 4.9 bn) through a simultaneous public issue in India and issue of American Depositary Shares (ADS). The issue entailed a dilution of 27% of the current share capital base and improved its CAR to 16.8% in 1HFY08.

Subsidiaries: The Life and non life insurance businesses retained market share of 26% and 31% respectively. The life insurance business had a NBAP margin of 19.7% while the general insurance business grew its profits by 166% (on a very small base) in 1HFY08.

What to expect?
At the current price of Rs 1,020, the stock is trading at 2.2 times our estimated FY10 adjusted book value. Although ICICI Bank’s growth prospects across product categories appear enthusing, our concerns with respect to the bank’s increasing delinquencies and pressure on margins remain undiluted. Having said that, while the long term prospects of the bank appear robust given the higher capital adequacy, strong retail penetration and relationship with the Indian corporates abroad, inability to sustain profitability and quality with growth might prove detrimental to the bank.

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