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ICICI Bank: No respite on NPAs

Nov 1, 2014 | Updated on Oct 30, 2019

ICICI Bank declared the results for the second quarter of financial year 2014-15 (2QFY15). The bank has reported 15% YoY growth in both net interest income and net profits for 2QFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 16% in 1HFY15 on the back of 14% YoY growth in advances while net interest margin (NIM) improved to 3.4% from 3.3% in 1HFY14.
  • Cost to income ratio reduces to 37.5% from 38.5% in 1HFY14.
  • Capital adequacy ratio healthy at 16.6% at the end of September 2014.
  • Net NPAs rise to 1% of advances in 1HFY15, from 0.7% in 1HFY14. Restructured loans (up 61.7% YoY) at 3.0% of advances in September 2014 as against 2.0% in September 2013.
  • Bottomline grows by 16% YoY in 1HFY15 largely due to higher interest margins and cost efficiency.

Standalone financials
Rs (m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Interest income 108,132 121,505 12.4% 212,339 239,174 12.6%
Interest Expense 67,697 74,939 10.7% 133,699 147,689 10.5%
Net Interest Income 40,435 46,566 15.2% 78,640 91,485 16.3%
NIM (%)       3.3% 3.4%  
Other Income 21,664 27,383 26.4% 46,507 55,882 20.2%
Other Expense 23,221 26,971 16.1% 48,127 55,221 14.7%
Provisions and contingencies 6,248 8,494 35.9% 12,179 15,755 29.4%
Profit before tax 32,630 38,484 17.9% 64,841 76,391 17.8%
Tax 9,110 11,394 25.1% 18,578 22,747 22.4%
Profit after tax / (loss) 23,520 27,090 15.2% 46,263 53,644 16.0%
Net profit margin (%) 21.8% 22.3%   21.8% 22.4%  
No. of shares (m)         1,157.4  
Book value per share (Rs)*         681.4  
P/BV (x)         2.4  

What has driven performance in 2QFY15?
  • ICICI Bank continued the good growth in retail credit in second quarter of FY15. The improved CASA proportion also came handy and helped the bank improve its net interest margins at a time when most other are feeling the pressure of higher cost. The bank's NIMs at 3.4% at the end of September quarter is higher than 3.3% in September 2013. It has also managed to retain margins at the same level for the past 6 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 corporate and SME loans in check. Hence most of the incremental lending was to the retail segment. There may be further upside in margins (NIMs) with a possibility of fall in interest costs.

    Loan growth focus shifts from corporate to retail
      1HFY14 % of total 1HFY15 % of total Change
    Advances 3,177,860   3,617,570   13.8%
    Retail 1,150,385 36.2% 1,439,793 39.8% 25.2%
    Corporate 1,035,982 32.6% 1,085,271 30.0% 4.8%
    SME 146,182 4.6% 162,791 4.5% 11.4%
    International 845,311 26.6% 929,715 25.7% 10.0%
    Deposits 3,090,460   3,520,550   13.9%
    CASA 1,339,080 43.3% 1,537,250 43.7% 14.8%
    Term deposits 1,751,380 56.7% 1,983,300 56.3% 13.2%

  • The bank had 0.5% of its investments in security receipts of asset reconstruction companies and credit derivative exposure (on and off balance sheet) at the end of September 2014.

  • Asset quality woes, particularly in terms of loan restructuring, continued to haunt ICICI Bank in the second quarter of FY15. The gross NPAs (non performing assets) in absolute terms have gone up by 10% over the past 12 months. However the steep rise in restructured loans signal possibility of spike in gross NPAs going forward. Net NPAs rose to 1% of advances in 1HFY15, from 0.7% in 1HFY14. The gross NPAs in retail loan portfolio stood at 3.2% of advances as against 3.4% in September 2013. The NPA coverage ratio stood at 68.4%.

  • Fee income (up 12% YoY) constituted 32.6% of ICICI Bank's total income in 1HFY15 as against 34.7% in 1HFY14.

  • Lower the direct marketing costs helped ICICI Bank bring down the cost to income ratio to 37.5% in 1HFY15 from 35.8% in 1HFY14. The return on equity however remained subdued at 14.9% at the end of 1HFY15.
What to expect?
At the current price of Rs 1,624, the stock is trading at a multiple of 1.9 times our estimated FY17 consolidated adjusted book value (excluding insurance businesses). The bank's performance has been in line with our estimates with regard to profit growth. However that is essentially due to lower costs and higher net interest margins. Moreover the slippage in asset quality remains high. 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 recommended investors to Sell the stock and book profits in May 2014.

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Jun 22, 2021 09:23 AM


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