ICICI Bank - the second largest bank in the country - has reported encouraging results for the September quarter. While the bank's topline has fallen marginally, its bottomline growth has been very strong at 41% in the September quarter on a YoY basis. For 1HFY04 also, the results are encouraging with a similar fall in topline and the bottomline rising by 38%. The performance must be viewed in light of the fact that the bank has show a steep fall in other income as well as a rise in operating/other expenses.
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There has been a fall in the bank's topline, which is in line with our expectations of a 4% dip in interest income for FY04. See Report There has been a marginal rise in interest income for the bank, indicating that its yields have reduced significantly. Advances have grown at 10% for the period ending September 2003. However, falling yields may have limited the rise in interest income from advances. In our research report we had assumed a growth of 17% in the bank's advances in FY04. However, in light of the 1HFY04 performance, we believe that such expectation is on the optimistic side. Thus, we will have to downgrade the growth expectation of the bank's advances. Interest income from investments also has fallen indicating that the bank may have booked profits on its G-Sec portfolio and invested at incrementally low yields.
Falling interest rates has however helped the bank to significantly reduce its interest expenses, thus improving net interest income considerably. The cost of deposits have reduced to 5.6% in the September quarter. The bank is steadily reducing its borrowings in order to leverage more on deposits as the erstwhile ICICI Ltd's borrowings were relatively high cost in nature. We expect the bank's deposit cost to reduce further during the year. This is likely to improve profitability. According to our assumptions its net interest margins may stand at around 2.2% at the end of FY04.
The bank has seen a significant rise in its operating expenses. This was in part due to a VRS scheme that the bank had initiated in 2QFY04. Rapid expansion in branch and ATM infrastructure may also have been the cause of this rise in operating expenses. Going forward, the savings due to VRS may help in bringing operating expenses under control. The bank's other income has fallen in the September quarter. This is mainly because in 2QFY03 the bank had reported an extraordinary income from the sale of shares of ICICI Bank held by ICICI Limited. Not accounting for this, there seems to be a strong improvement in other income. However, the magnitude of improvement in core fee based income may be limited and most of the growth in other income may be on account of profits from the sale of G-Secs. Provisioning also has been lower. This was expected, as in the same period last year, the bank had made excess provisioning from the extraordinary income (sale of stake) that the bank had in the same period.
At Rs 248, the stock is trading at a P/E multiple of 10x its annualised 1HFY04 earnings. The adjusted price to book value (based on net NPAs in FY03) stands at 3.2x. ICICI Bank has done well to reduce its interest expenses and consequently improve its net interest income and margins. Going forward we believe that the bank will leverage strongly on the retail segment for both deposits as well as advances. However, as this may bring down the interest expenses we may find increasing pressure on interest income, due to falling yields. Hence, ICICI Bank may witness subdued topline growth, with improvement in bottomline going forward. However, the improvement in bottomline may be restricted due to high level of NPAs (4.8%) and the provisioning required for the same. Considering the asset quality of the bank and its growth potential we believe that the stock price seems a bit stretched (on the basis of valuations).
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