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ICICI Bank: Profits on firmer ground - Views on News from Equitymaster

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ICICI Bank: Profits on firmer ground
Oct 26, 2012

ICICI Bank declared the results for the second quarter and first half of financial year 2012-2013 (1HFY13). The bank has reported 34% YoY growth in net interest income and 33% YoY growth in net profits for the first half. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 33% in 1HFY13 on the back of 18% YoY in advances while net interest margin (NIM) improved to 3.0% from 2.6% in 1HFY12.
  • Cost to income ratio reduces to 41% from 45% in 1HFY12.
  • Capital adequacy ratio healthy at 18.3% at the end of September 2012.
  • Net NPAs move up marginally from 0.7% of advances in 1QFY13 to 0.8% in 2QFY13 (0.9% in 2QFY12).
  • Bottomline grows by 33% YoY in 1HFY13 largely due to higher interest margins and cost efficiency. This is despite increase in provisioning which enhanced coverage ratio to 79% in September 2012.
  • Restructured assets were 1.5% of loan book in 1HFY13.

Standalone financials
Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Interest income 81,576 100,263 22.9% 157,761 195,719 24.1%
Interest Expense 56,511 66,551 17.8% 108,587 130,078 19.8%
Net Interest Income 25,065 33,712 34.5% 49,174 65,641 33.5%
NIM (%)       2.6% 3.0%  
Other Income 17,395 20,429 17.4% 33,824 39,228 16.0%
Other Expense 18,922 22,209 17.4% 37,120 43,444 17.0%
Provisions and contingencies 3,187 5,079 59.4% 7,726 9,737 26.0%
Profit before tax 20,351 26,853 31.9% 38,152 51,688 35.5%
Tax 5,317 7,292 37.1% 9,797 13,976 42.7%
Profit after tax / (loss) 15,034 19,561 30.1% 28,355 37,712 33.0%
Net profit margin (%) 18.4% 19.5%   18.0% 19.3%  
No. of shares (m)         1,153.1  
Book value per share (Rs)*         559.0  
P/BV (x)         1.9  

What has driven performance in 1HFY13?
  • At 18% YoY, ICICI Bank's loan growth may have been a shade lower than the growth rate posted by most of its private sector peers so far for 1HFY12. However, given the bank's balance sheet size the cautious undertone has certainly paid off by way of better and more stable net interest margins. The bank's NIMs at 3% at the end of September quarter is not just higher than 2.6% in 1HFY12. It has also managed to retain margins at the same level for the past 3 quarters. Thus, ICICI Bank has displayed ample resilience to the economic downturn over the past few quarters.

    While keeping its incremental exposure to retail loans limited, ICICI Bank's loan growth was pretty much in line with the sector average and marginally higher than our estimates. Moreover, ICICI Bank seems to have kept a close eye on CASA deposits. The bank's deposits grew by 15% YoY in 1HFY13, while there was 18% YoY growth in the term deposit base. However, the proportion of low cost deposits (CASA) was sustained at 41%, which is amongst the highest in the sector.

    On the assets side, ICICI Bank has kept the proportion of retail advances lower. However most of the incremental lending was to the mid and large corporate segment. This ensured that the bank kept its net interest margins stable without hurting asset quality. Going forward, however, the bank may see some NPA risks emanating from its exposure to the power sector, particularly SEBs (state electricity boards). The margins (NIMs) may remain stable with fall in interest costs.

    Concentration on Corporate & SME
      1HFY12 % of total 1HFY13 % of total Change
    Advances 2,339,520   2,750,760   17.6%
    Agriculture 210,557 9.0% 187,052 6.8% -11.2%
    Retail 845,429 41.0% 932,508 33.9% 10.3%
    Corporate 467,904 20.0% 783,967 28.5% 67.5%
    SME 93,581 4.0% 137,538 5.0% 47.0%
    International 608,275 26.0% 709,696 25.8% 16.7%
    Deposits 2,450,920   2,814,380   14.8%
    CASA 1,031,460 42.1% 1,144,180 40.7% 10.9%
    Term deposits 1,419,460 57.9% 1,670,200 59.3% 17.7%

  • The bank had 0.6% of its investments in security receipts of asset reconstruction companies and credit derivative exposure (on and off balance sheet) at the end of September 2012.

  • The gross NPAs (non performing assets) in absolute terms have remained stable over the past 12 months. The gross and net NPAs stood at 3.7% (4.5% in September 2012) and 0.8% of advances respectively at the end of September 2012 (0.9% in 1HFY12). The NPA coverage ratio stood at 79%. The restructured loans comprised 1.5% of ICICI's overall loan book at the end of September 2012. Worth noting that the bank also sold some of its exposure to Kingfisher Airlines to an arm of Srei Infra Finance in 1HFY12.

  • Fee income constituted 32% of ICICI Bank's total income in 1HFY13 same as in 1HFY12. The 16% YoY growth in other income was boosted by dividend from subsidiaries.

  • Although ICICI Bank has halved the direct marketing costs, the cost of operating the incremental branches increased by 17% YoY and the cost to income ratio reduced to 41% from 45% in 1HFY12.

What to expect?
At the current price of Rs 1,077, the stock is trading at a multiple of 1.5 times our estimated FY15 consolidated adjusted book value (excluding insurance businesses). The bank's performance boosts our confidence with regard to its margins and asset quality. Also, ICICI Bank's CAR (capital adequacy ratio) of 18.3% at the end of September 2012 is amongst the highest in the sector. This gives the bank sufficient headroom for growth even after complying with the Basel II norms. While NPA risks cannot be ruled out, we do not see the same significantly impacting the bank's long term fundamentals. We recently recommended investors to Hold on to the stock.

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