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ICICI Bank: Punished beyond guilt - Views on News from Equitymaster
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ICICI Bank: Punished beyond guilt
Oct 27, 2008

Performance summary
  • Interest income grows by 5.9% YoY in 1HFY09 on the back of 7% YoY growth in advances.
  • Net interest margin improves to 2.6% due to higher CASA proportion.
  • Operating costs drop marginally with cost to income ratio at 48% in 1HFY09 (53% in 1HFY08).
  • Capital adequacy ratio very healthy at 14.0% in 1HFY09.
  • Net NPAs higher at 1.8% of advances from 1.6% in 4QFY08; consolidated net NPAs at 1.6%.
  • Despite cost curtailment, bottomline drops by 2% YoY in 1HFY09 due to treasury losses and higher provisioning.

Standalone numbers
Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest income 75,164 78,349 4.2% 148,473 157,267 5.9%
Interest Expense 57,304 56,873 -0.8% 115,823 114,894 -0.8%
Net Interest Income 17,860 21,476 20.2% 32,650 42,373 29.8%
Net interest margin (%)       2.2% 2.6%  
Other Income 20,719 18,773 -9.4% 40,225 34,155 -15.1%
Other Expense 19,708 17,404 -11.7% 38,761 36,539 -5.7%
Provisions and contingencies 6,445 9,235 43.3% 11,967 17,160 43.4%
Profit before tax 12,426 13,610 9.5% 22,147 22,829 3.1%
Tax 2,400 3,472 44.7% 4,369 5,407 23.8%
Profit after tax/ (loss) 10,026 10,138 1.1% 17,778 17,422 -2.0%
Net profit margin (%) 13.3% 12.9%   12.0% 11.1%  
No. of shares (m)       899.3 1,113.1  
Book value per share (Rs)*         437.0  
P/BV (x)         0.7  
* Book value as on 30th September 2008

What has driven performance in 2QFY09?
  • Liquidity pressure due to inability to withhold domestic customer deposits and limited borrowing ability in the overseas markets marred ICICI Bank’s performance this quarter. In fact, this stretched the bank’s credit deposit ratio to the limit of 99.4%. ICICI Bank also avoided raising high deposits to conserve its capital base (CAR). The bank’s consolidated advances (including ICICI Home Finance and its international branches) grew by 16% YoY. The bank has not divulged the details of its advance portfolio at the end of 1HFY09.

    Low cost deposits (CASA) comprised 30% of ICICI Bank’s total deposits at the end of 1HFY09 (25% in 1HFY08). These helped the bank improve its NIMs (net interest margins) to 2.6% by 2QFY09. While the bank’s advance growth is lower than our full year estimates, it has performed reasonably well on the profitability front.

    Stretched to the brim…
    (Rs m) 1HFY08 % of total 1HFY09 % of total Change
    Advances 2,071,210   2,219,850   7.2%
    Total deposits 2,283,070   2,234,020   -2.1%
    CASA 570,768 25.0% 670,206 30.0% 17.4%
    Term deposits 1,712,303 75.0% 1,563,814 70.0% -8.7%
    Credit /Deposit 90.7%   99.4%    

  • The pressure of undercutting its peers by offering very competitive interest rates, especially in retail loans seems to have shown its colours as the gross NPAs (non performing assets) in absolute terms has nearly doubled in ICICI Bank’s books. The bank’s net NPAs (as percentage of total advances) increased to 1.8% in 1HFY09, from 1.6% in 4QFY08. The level of incremental delinquencies (slippages in asset quality) has been sequentially increasing every quarter for the past five quarters.

  • Fee income (constituting 25% of ICICI Bank’s total income) grew by a robust 26% YoY during the 12 months ended 1HFY09. However, sharp increase in interest rates and adverse market conditions during the first quarter of FY09 had a negative impact on the bank’s trading portfolio and which led to a 10% YoY drop in other income.

  • ICICI Bank’s Canada subsidiary posted a profit of Canadian dollar 22 m with a CAR of 15.4%. The UK subsidiary had a net loss of US$ 35 m (after mark-to-market impact provision of US$ 43 m) and CAR of 18.4% at the end of September 2008. The subsidiaries are therefore sufficiently capitalised for the medium term.

What to expect?
At the current price of Rs 312, the stock is trading at a multiple of 0.5 times our estimated FY11 adjusted book value. Despite ICICI Bank’s growth prospects across product categories especially international assets appear enthusing, our concerns with respect to its increasing delinquencies 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. We may have revised our estimates and target price after factoring in the underperformance with regard to advance growth and asset quality.

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