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ICICI Bank: Retail NPAs, bond provisions mar quarter - Views on News from Equitymaster
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  • Oct 26, 2013 - ICICI Bank: Retail NPAs, bond provisions mar quarter

ICICI Bank: Retail NPAs, bond provisions mar quarter
Oct 26, 2013

ICICI Bank declared the results for the second quarter and first half of financial year 2013-14 (1HFY14). The bank has reported 20% YoY growth in net interest income and 23% YoY growth in net profits for 1HFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 20% in 1HFY14 on the back of 16% YoY growth in advances while net interest margin (NIM) improved to 3.3% from 3.0% in 1HFY13.
  • Cost to income ratio reduces to 38.5% from 41.4% in 1HFY13.
  • Capital adequacy ratio healthy at 16.5% at the end of September 2013.
  • Net NPAs rise to 0.73% of advances in 1HFY14, from 0.69% in 1HFY13.Restructured loans at 2.1% of advances.
  • Bottomline grows by 22.7% YoY in 1HFY14 largely due to higher interest margins and cost efficiency.
Standalone financials
Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Interest income 100,263 108,132 7.8% 195,719 212,339 8.5%
Interest Expense 66,551 67,697 1.7% 130,078 133,699 2.8%
Net Interest Income 33,712 40,435 19.9% 65,641 78,640 19.8%
NIM (%)       3.0% 3.3%  
Other Income 20,429 21,664 6.0% 39,228 46,507 18.6%
Other Expense 22,209 23,221 4.6% 43,443 48,127 10.8%
Provisions and contingencies 5,079 6,248 23.0% 9,737 12,179 25.1%
Profit before tax 26,853 32,630 21.5% 51,689 64,841 25.4%
Tax 7,292 9,110 24.9% 13,976 18,578 32.9%
Profit after tax / (loss) 19,561 23,520 20.2% 37,713 46,263 22.7%
Net profit margin (%) 19.5% 21.8%   19.3% 21.8%  
No. of shares (m)         1,154.5  
Book value per share (Rs)*         633.2  
P/BV (x)         1.6  
* (Standalone book value as on 30th September 2013)

What has driven performance in 1HFY14?
  • Barely different from that of its peers in the sector, the performance of ICICI Bank reflected the sluggish pace of growth in credit in Indian banking. The improved CASA proportion however came handy and helped the bank improves its net interest margins at a time when most other are feeling the pressure of higher cost. The bank's NIMs at 3.1% at the end of June quarter is not just higher than 3% in 1QFY13. It has also managed to retain margins at the same level for the past 5 quarters. In terms of loan growth and deposit growth, ICICI Bank's numbers have come in line with the growth rate posted by most of its private sector peers.

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

    Loan growth concentrated in corporate segment
      1HFY13 % of total 1HFY14 % of total Change
    Advances 2,750,760   3,177,860   15.5%
    Retail 962,766 35.0% 1,150,385 36.2% 19.5%
    Corporate 935,258 34.0% 1,035,982 32.6% 10.8%
    SME 143,040 5.2% 146,182 4.6% 2.2%
    International 709,696 25.8% 845,311 26.6% 19.1%
    Deposits 2,814,380   3,090,460   9.8%
    CASA 1,144,180 40.7% 1,339,080 43.3% 17.0%
    Term deposits 1,670,200 59.3% 1,751,380 56.7% 4.9%

  • 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 2013.

  • The gross NPAs (non performing assets) in absolute terms have remained stable over the past 12 months. The gross and net NPAs stood at 3.2% and 0.7% of advances respectively at the end of September 2013. The NPAs in retail loan portfolio stood at 4.3% of advances. The NPA coverage ratio stood at 73.1%. The restructured loans comprised 2.1% of ICICI's overall loan book at the end of September 2013.

  • Fee income constituted 32% of ICICI Bank's total income in 1HFY14 as against 38.7% in 1HFY13. In 2QFY14, ICICI Bank fully recognized the mark-to-market provisions of Rs 2.8 bn on its investment portfolio. Also the bank transferred SLR securities to the tune of Rs 23 bn from AFS and HFT category to HTM category, thereby taking write down of Rs 100 m on account of the movement of bond yields.

  • Lower the direct marketing costs helped ICICI Bank bring down the cost to income ratio to 38.5% in 1HFY14 from 41.4% in 1HFY13.
What to expect?
At the current price of Rs 1021, the stock is trading at a multiple of 1.3 times our estimated FY16 consolidated adjusted book value (excluding insurance businesses). The bank's performance has been in line with our estimates with regard to loan growth and margins. However the slippage in asset quality remains under review. While growth will continue at a muted pace in the near term, ICICI Bank is well capitalized to take advantage of lending opportunities as and when the economy picks up.

Worth noting that we value ICICI Bank at a relative discount to private sector peers due the bank's past history of risky operations and managerial decision making. We recommend investors to hold on to the stock.

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