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ICICI Bank: Pulling all strings! - Views on News from Equitymaster
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ICICI Bank: Pulling all strings!
Oct 26, 2006

Performance summary:
ICICI Bank reported robust set of numbers for the quarter and half-year ended September 2006, primarily backed by accelerated asset growth and buoyant fee income. The bank witnessed a strong traction in its rural and international portfolios. The steady NIMs and lower tax incidence also aided the bottomline growth for the period under review. A higher slippage ratio, however, poses some concerns on the quality of incremental lending.

Rs (m) 1QFY06 1QFY07 Change 1HFY06 1HFY07 Change
Income from operations 33,293 54,694 64.3% 64,453 105,081 63.0%
Other Income 11,115 15,701 41.3% 22,021 28,477 29.3%
Interest Expense 22,598 38,924 72.2% 44,064 74,558 69.2%
Net Interest Income 10,695 15,770 47.5% 20,389 30,523 49.7%
Net interest margin (%)       2.2% 2.5%  
Other Expense 11,370 15,352 35.0% 22,261 30,567 37.3%
Provisions and contingencies 3,038 7,093 133.5% 6,017 11,921 98.1%
Profit before tax 7,402 9,026 21.9% 14,132 16,512 16.8%
Tax 1,601 1,475 -7.9% 3,031 2,761 -8.9%
Profit after tax/ (loss) 5,801 7,550 30.2% 11,101 13,751 23.9%
Net profit margin (%) 10.6% 22.7%   10.6% 21.3%  
No. of shares (m) 740.9 892.9   740.9 892.9  
Diluted earnings per share (Rs)* 31.3 33.8   30.0 30.8  
P/E (x)         24.0  
* (trailing 12 months)

Encashing retail
ICICI Bank, in terms of asset size, is the second largest bank in the country after SBI. At the end of 2QFY07, the bank had a franchise of over 2,275 ATMs and 625 branches spread across the country. Retail assets constituted 69% of advances in 1HFY07. 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 2QFY07?
Assets growth – No hold up: Interestingly, ICICI Bank’s advance growth in this quarter has not only been aided by the retail segment, which comprises nearly three-fourth of the bank’s advance portfolio, but the rural and international portfolios have also seen an appreciable traction. The bank has leveraged the Indian corporate client base overseas to grow its international loan book by 56% YoY (10% of advances in 1HFY07). The 57% YoY growth in retail segment continues to help the bank in retaining the distinction of being the largest retail asset base in India. In fact, the bank seems to be enjoying the dual benefits of shedding off the erstwhile ICICI’s high cost borrowings (comprising 22% of total borrowings at the end of 1HFY07) and repricing its retail assets (especially mortgage loans) that have enabled it to prop up its NIMs to 2.5%. During 1HFY07, the bank witnessed a growth of 57% YoY in its deposit base against the average industry growth rate of 20%. However, the CASA ratio continues to remain low at 23%.

  1HFY06 % of total 1HFY07 % of total Change
Advances 1,070,710   1,554,030   45.1%
Retail 685,370 64.0% 1,076,790 69.3% 57.1%
Corporate 385,340 36.0% 477,240 30.7% 23.8%
Investments 553,180   829,930   50.0%
Deposits 1,204,520   1,894,990   57.3%
Borrowings 421,710   516,010   22.4%
ICICI borrowings 154,110 36.5% 114,000 22.1% -26.0%
Other borrowings 267,600 63.5% 402,010 77.9% 50.2%
Credit /Deposit 88.9%   82.0%    

Fee momentum: Fee income (constituting 38% of the bank’s total income) grew by a staggering 62% YoY and has been a significant contributor to the bank’s profitability over the past few quarters. The same may sustain going forward if the bank continues to leverage its corporate client base overseas. 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).

Embargo on branch expansion: The IPO scam early this fiscal proved to be very detrimental to the growth of banks like ICICI Bank, with the RBI placing an embargo on the additional branch licences to be issued for a year. ICICI Bank that traditionally grows its branch franchise by nearly 10% each fiscal has not had any significant expansion in franchise in 1HFY07. While it is appreciable that the bank has not let this handicap come in its way of augmenting its advance base so far, the same may not hold true for long. The same has also enabled the bank to hold back its cost to income ratio at 52% in 1HFY07, which otherwise would have seen an uptick.

Growth at the cost of quality? The bank has succeeded in bringing down the net NPA to advance ratio to 0.9% from 1% at the end of 1HFY06. However, there has been case of incremental delinquencies (slippages in asset quality) in the retail portfolio, which has risen from 0.5% to 1% during the same period. It must also be noted that the bank had a slippage of 25% in its gross NPAs during the first half of FY07, suggesting higher propensity of slippage in its incremental lending. The provisioning cover continues to decline at a faster rate as compared to its net NPAs, which calls for additional risk mitigation.

Geared for Basel II: The bank’s CAR (capital adequacy ratio) has improved to 14.3% in 1HFY07 against 12% in 1HFY06. This is despite the fact that it had to assign risk weightage of 75% on retail mortgage and 125% on commercial real estate and capital market exposure. It is estimated that the bank will stand to benefit with the Basel II compliance that will release some capital and bring its CAR to 14.9% (Tier I capital at 10.58%), thus making it well heeled for asset growth.

What to expect?
At the current price of Rs 739, the stock is fairly priced at 2.5 times our estimated FY09 adjusted book value. While the asset growth and NIM figures have outdone our estimations, we choose to adopt a cautious stance given the possibility of higher delinquencies and pressure on margins. While the medium term prospects of the bank appear robust given the higher capital adequacy, strong retail penetration and relationship with the Indian corporates abroad, we see most of these already having been factored into its stock price. The possibility of listing of subsidiaries is visible only beyond 2009.

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