ICICI Bank's performance for the September quarter seems rather subdued compared to its performance in the June quarter. While the topline trend remains lackluster (marginal rise) the bottomline growth has been subdued at 10% YoY, mainly on account of higher provisioning requirements, which we believe is primarily on account of depreciation in its investment portfolio. We however need to point out that there is a significant rise in net interest income (45% YoY), signaling the improving performance of the bank's core lending business, which has come despite a marginal rise in the topline.
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India's second largest bank
ICICI Bank post merger with its parent ICICI has emerged as the second largest bank in the country after SBI in terms of asset size. The bank provides a range of corporate and retail banking services. 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. It is also the first Indian bank to offer Internet banking and also the first Indian bank to list on NYSE. At the end of FY04 the bank had an ATM network of over 1,790 ATMs and 470 branches spread across the country.
Strong growth in core interest income
Sales: ICICI Bank, continues to register spectacular growth (57% YoY) in its retail advances, while its non retail advances have reported a marginal fall in the September quarter. Retail advances now account for nearly 58% of advances compared to 52% a year ago. Despite the strong growth in advances (25%, YoY, in the period ending September 2004), the bank has not been able to grow its topline. This is primarily on account of the fact that while interest income from advances have grown, there has been a decline in interest income from investments. Lower incremental yields are taking a toll on the bank's interest income.
NIMs, improving still: The bank has managed to bring down its interest expenses and this has helped it to improve its net interest income and consequently, its net interest margins (NIM). Cost of deposits have reduced to 4.4% in the September quarter from 5.8% last year. In a bid to reduce its interest expenses, the bank is steadily pruning its borrowings in order to leverage more on low cost savings and current deposits. While the bank has not disclosed its net interest margins we believe that there has been an improvement in the same. We expect a continuous improvement in this going forward due to further replacement of erstwhile ICICI's term loans with low cost deposits. All this is likely to lead to a robust growth in net interest income going forward. Operating expenses continue to rise led by the bank's infrastructure expansion initiatives to capture the credit growth potential in the country.
Fee income growth helps bottomline growth: There has been a significant improvement (106% YoY) in core fee based income in the September quarter. Treasury income on the other hand has fallen by over 274% YoY, in the September quarter, due to the impact of lower profits from sale of investments (which has been impacted due to rising interest rates). Due to the sharp rise in core fee based income, the bank seems to have mitigated the effect of lower profits from sale of investments. At the same time however we see a fall in provisioning, however not to the extent seen in the June quarter. This may be on account of higher provisioning requirements for impairment of its G-Sec investments. The bank has not provided any breakup of its provisioning and hence we would not be able to provide any further clarity. Lower provisioning for NPAs has also to an extent helped in the improvement of the growth in bottomline. Net NPA to advances ratio stands at 2.6% in 2QFY05 compared to 4.8% in 2QFY04. The ratio however, continues to be higher in comparison to other peers like HDFC Bank, UTI Bank and IDBI Bank.
What to expect?
At the current price of Rs 290, the stock is trading at a price to adjusted book value multiple of 1.8 times. ICICI Bank is slowly addressing all the concerns plaguing it and this is likely to improve investor sentiment towards the bank. At the same time it also seems to be effectively addressing competition. With improvement in almost all of its operational parameters we believe ICICI Bank is taking the right steps to emerge as one of the most profitable banks in the country.
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