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ICICI Bank |
Extraordinary performance |
HOLD
CMP: Rs 1,162 Target Price: Rs 1,200
n ICICI Bank’s Q2FY11 NII/PAT at Rs22.0/12.4bn were ahead of our estimates. The stronger performance was driven by better NIMs (+10bps qoq) and lower than expected provisions
n The net addition to ICICI Bank’s NPAs was almost zero during the quarter. Total/retail net slippages at Rs2.6bn/1.7bn, only due to BoR merger
n Other positives: (1) 13% qoq growth in core operating profit driven by strong fees and (2) provision cover at 69%, reached 70% earlier than guided.
n Valuations at 2.2x FY11E/2.0x standalone FY12E ABV not unreasonable looking at peer group valuations. Upgrade to HOLD with TP of Rs1200
Better than expected NII driven by NIMs
ICICI Bank’s NII for Q2FY11 grew by 10.7% qoq driven by better than expected NIMs.
We were expecting NIMs to be flat whereas they have expanded by 10bps qoq.
Additional liquidity can help maintain margins
ICICI Bank is carrying excess liquidity of Rs250bn on book as of now and hence we
believe that despite the growth in balance sheet expected in H2FY11, the NIMs at 2.6%
are maintainable.
Advances grow driven by consolidation of BOR
The advances have grown by 5.3% qoq to Rs1.9tn. However, most part of the growth was
driven by merger of the Bank of Rajasthan advances (Rs65.3bn). Adjusted for the same,
the growth was at just 1.8%. The large corporate loan book continued to do well as it grew
strongly by 36% yoy and 28% qoq (including BoR).
Retail book shows growth as home loans booked in bank
The retail asset book grew by 2.4% qoq mainly driven by the mortgages. The disbursals in
home loan segment were at Rs45bn. Incrementally large part of home loans were booked
in the bank instead of housing finance company.
Term deposits didn’t shrink for the first time in 6-8 quarter
After declining for last 6-8 quarters the term deposits remained flat qoq (adjusted for BoR
merger). The CASA adjusted for BoR CASA has grown by ~10.5% qoq. The overall CASA
has expanded by 187bps qoq.
Strong corporate business continues to drive fees
The fee income grew by strong 12.5% qoq driven by the corporate business. The fee
income as % of assets continued to be strong at 1.6% vs 1.4% average for FY10.
Core profitability improves significantly
With strong growth in core revenues, the core profitability has improved significantly. The
operating profits excluding trading gains have grown by 13.1% qoq compared with an
average growth of 0.5-0.8% for last eight quarters.
The core operating profit growth was despite the fact that the employee costs have gone up
by 8.5% qoq due to the inclusion of BoR employees and upgradation in their payscale.
Improvement in slippages continues
The moderation in slippages continued as ICICI Bank added Rs2.6bn of loss assets on net
basis during the quarter, almost all attributable to BoR. The provision cover stood at 69%,
almost near 70%, much earlier than guided by the management.
Growth picks up in overseas subsidiaries
The performance of UK and Canada banking subsidiaries continued to remain stable as the
profit stood at USD8.4mn (including Rs4.1mn MTM write back) and CAD7.6mn for Q2FY11
respectively.
During Q2FY11, the UK subsidiary’s assets grew by 4.3% qoq; however the much of the
new mobilisations were parked in cash and liquid securities. Canada subsidiary’s book
continued to shrink as the same was down 3.8% qoq.
Update on BoR merger – net worth almost written down by 90%
The reported/tangible networth of BoR as on March 2010 were Rs9.4bn/Rs5.4bn, the same
was written down to Rs3.6bn to give effect to the provision cover of 70%, employee benefits
and DTA reversals. Further, ICICI Bank has taken a hit of Rs2.7bn on reserves for gratuity
liability and MTM losses on investment portfolio.
On the integration side, all the employees of BoR have been mapped in ICICI Bank with
their payscales brought in line with that of ICICI Bank.
Valuations and view
We maintain our estimates of 25% CAGR in earnings over FY10-12E for ICICI Bank with
core RoE of 12.5% (10% in FY10) as the credit costs come down. We have now valued the
banking operations of ICICI Bank at 2x on FY12E P/ABV and upgrade the stock to HOLD
rating with price target of Rs1200 (including Rs313 for non-banking subsidiaries).
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