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ICICI Bank: Provision write-backs boost profits - Views on News from Equitymaster

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ICICI Bank: Provision write-backs boost profits
Oct 31, 2011

ICICI Bank declared the results for the second quarter and first half of financial year 2011-2012 (1HFY12). The bank has reported 17% YoY growth in net interest income and 25% YoY growth in net profits for the half year period. Here is our analysis of the results.

Performance summary
  • Interest income grows by 30% in 1HFY12 on the back of 20% YoY in advances while net interest margin (NIM) remains stable at 2.6%.
  • Operating costs move up with cost to income ratio at 45% in 1HFY12 (41% in 1HFY11).
  • Capital adequacy ratio healthy at 18.9% at the end of September 2011.
  • Net NPAs improve to 0.8% of advances in 1HFY12 (1.4% in 1HFY11).
  • Other income grows by just 4% in 1HFY12 due to stagnant fee to other income ratio.
  • Bottomline grows by 25% YoY in 1HFY12 largely due to write back of provisioning. Provision coverage ratio at 78% in September 2011.


Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 63,091 81,576 29.3% 121,216 157,761 30.1%
Interest Expense 41,047 56,511 37.7% 79,262 108,587 37.0%
Net Interest Income 22,044 25,065 13.7% 41,954 49,174 17.2%
NIM (%)       2.6% 2.6%  
Other Income 15,779 17,395 10.2% 32,584 33,824 3.8%
Other Expense 15,704 18,922 20.5% 30,538 37,120 21.6%
Provisions and contingencies 6,411 3,187 -50.3% 14,389 7,726 -46.3%
Profit before tax 15,708 20,351 29.6% 29,611 38,152 28.8%
Tax 3,345 5,317 59.0% 6,988 9,797 40.2%
Profit after tax / (loss) 12,363 15,034 21.6% 22,623 28,355 25.3%
Net profit margin (%) 19.6% 18.4%   18.7% 18.0%  
No. of shares (m)         1,152.4  
Book value per share (Rs)*         508.5  
P/BV (x)         1.8  
* (Book value as on 30th September 2011)

What has driven performance in 1HFY12?
  • ICICI Bank maintained a cautious growth rate in 1HFY12 keeping a close eye on CASA deposits and net interest margins. ICICI Bank’s advances grew by 20% YoY in 1HFY12. This was backed by 10% YoY growth in the deposit base. The proportion of low cost deposits (CASA) dropped from 44% in 1HFY11 to 42% in 1HFY12 due to higher interest rates offered on term deposits. On the assets side, ICICI Bank has arrested the fall in retail advances despite keeping the proportion 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 (5% of total loan book), particularly SEBs (state electricity boards). Having said that, we do not see the entire SEB exposure turning bad as most of the loans carry government guarantee.

    Cost break-up...
      1HFY11 % of total 1HFY12 % of total Change
    Advances 1,942,010   2,339,520   20.5%
    Agriculture 174,781 9.0% 175,464 7.5% 0.4%
    Retail 796,224 41.0% 818,832 35.0% 2.8%
    Corporate 388,402 20.0% 566,164 24.2% 45.8%
    SME 77,680 4.0% 109,957 4.7% 41.6%
    International 504,923 26.0% 669,103 28.6% 32.5%
    Deposits 2,230,940   2,450,920   9.9%
    CASA 846,180 44.0% 966,350 42.1% 14.2%
    Term deposits 1,384,760 56.0% 1,484,570 57.9% 7.2%

  • The bank had 1.8% of its investments in security receipts of asset reconstruction companies and 1.3% of its investments in credit derivative exposure (on and off balance sheet) at the end of September 2011.

  • The gross NPAs (non performing assets) in absolute terms have remained stable over the past 12 months. The gross and net NPAs stood at 4.6% and 0.8% of advances respectively at the end of September 2011. The NPA coverage ratio stood at 78%, above the RBI mandate of 70%. While the coverage ratio is comfortable at the current stage, we believe that the act of writing back provisions to perk up profits was a little premature given the lingering delinquency risks.

  • Fee income constituted 39% of ICICI Bank’s total income in 1HFY12 same as in 1HFY11. The 4% YoY fall in other income was primarily due to lower treasury income.

  • Although ICICI Bank has halved the direct marketing costs, the cost of operating the incremental branches increased the cost to income ratio from 41% to 45% in 1HFY12. The bank has a total hiring plan of 5,000 employees for FY12.

What to expect?
At the current price of Rs 931, the stock is trading at a multiple of 1.5 times our estimated FY14 consolidated adjusted book value (excluding insurance businesses). The bank’s margins and other income potential do have substantial upside in the long term. Also, ICICI Bank's CAR (capital adequacy ratio) of 18.9% at the end of September 2011 was 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 reiterate our positive view on the stock.

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