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ICICI Bank: On cautious footing - Views on News from Equitymaster

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ICICI Bank: On cautious footing
Oct 30, 2010

ICICI Bank declared its 2QFY11 results. The bank has reported 8% YoY growth in net interest income and 19% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary
  • Interest income falls by 12% YoY while advances grow by a marginal 2% YoY in 1HFY11. Net interest margin (NIM) improves due to higher CASA proportion (42% of deposits).
  • Operating costs move up with cost to income ratio at 41% in 1HFY11 (37% in 1HFY10).
  • Capital adequacy ratio healthy at 20.2% at the end of 1HFY11.
  • Net NPAs improve to 1.4% of advances in 2QFY11 (2.2% in 2QFY10).
  • Bottomline grows by 18% YoY in 1HFY11 due to lower provisioning costs despite fall in other income.


Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Interest income    66,569      63,091 -5.2%    137,903 121,216 -12.1%
Interest Expense    46,208      41,047 -11.2%       97,690       79,262 -18.9%
Net Interest Income    20,361      22,044 8.3%       40,213       41,954 4.3%
NIM (%)       2.4% 2.6%  
Other Income    18,237      15,779 -13.5%       39,136       32,584 -16.7%
Other Expense    14,245      15,703 10.2%       29,705       30,538 2.8%
Provisions and contingencies    10,713 6,411 -40.2%       23,949       14,389 -39.9%
Profit before tax    13,640      15,709 15.2%       25,695       29,611 15.2%
Tax      3,239 3,345 3.3% 6,511 6,988 7.3%
Profit after tax / (loss)    10,401      12,364 18.9%       19,184       22,623 17.9%
Net profit margin (%) 15.6% 19.6%   13.9% 18.7%  
No. of shares (m)              1,150.8  
Book value per share (Rs)*         469.0  
P/BV (x)              2.5  
* (Book value as on 30th September 2010)

What has driven performance in 2QFY11?
  • After several quarters of de-growth, ICICI Bank has finally shown some willingness to grow its balance sheet, albeit at a very measured pace. The bank’s advances grew by 2% YoY in 1HFY11. This was backed by 13% YoY growth in the deposit base as well. Appreciably all the growth in deposits came in from accretion to CASA. On the assets side, ICICI Bank has attributed the fall in retail advances to repayments. However the bank's unwillingness to incremental lending to the retail segment was also evident. On the liabilities side, CASA (low cost) deposits grew to 42% of the bank's total deposits in 1HFY11 from 30% in 1HFY10.

    Corporate loans lend growth
      1HFY10 % of total 1HFY11 % of total Change
    Advances    1,908,600       1,942,010   1.8%
    Agriculture       171,774 9.0%        135,941 7.0% -20.9%
    Retail       782,526 41.0%        776,804 40.0% -0.7%
    Corporate       381,720 20.0%        466,082 24.0% 22.1%
    SME          76,344 4.0%          77,680 4.0% 1.8%
    International       496,236 26.0%        485,503 25.0% -2.2%
    Deposits    1,978,320       2,230,940   12.8%
    CASA       729,300 30.4%        981,050 42.0% 34.5%
    Term deposits    1,249,020 63.1%     1,249,890 56.0% 0.1%

    Higher CASA proportion helped improve the bank’s NIMs from 2.4% in 1HFY10 to 2.6% in 1HFY11. For full year FY11, the bank is estimating advance growth at marginally lower than the industry average rates (18 to 20%).

  • The gross NPAs (non performing assets) in absolute terms have marginally reduced in ICICI Bank’s books in the past 12 months. The bank’s net NPAs (as percentage of total advances) also came down marginally to 1.4% in 1HFY11, from 2.2% in 1HFY10. The NPA coverage ratio stood at 69%, close to the RBI mandate of 70%.

  • Fee income constituted 40% of ICICI Bank’s total income in 1HFY11 as against 34% in 1HFY10. The 17% YoY fall in other income was primarily due to fall in treasury income.

  • Although ICICI Bank has halved the direct marketing costs, the cost of operating the incremental branches may increase the cost to income ratio from the current levels (40% in FY11). The bank plans to hire 5,000 employees during FY11.

What to expect?
At the current price of Rs 1,162, the stock is trading at a multiple of 2.2 times our estimated FY13 standalone adjusted book value (including ICICI Home Finance). While it is encouraging to note that ICICI Bank has become cautious about growing its balance sheet size, the potential risks due to low provision coverage cannot be sidelined. While the bank’s margins and other income income potential do have substantial upside, we continue to believe that the current valuations of the bank (ResearchPro subscribers can view latest updates here) leave very little on the table for investors.

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