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ICICI BANK 2QFY11: Inline (adj for merger); loan growth picks up QoQ; operating parameters remain healthy; Maintain Buy
ICICI Bank (ICICIBC IN, Mkt Cap US$30b, CMP Rs1162, Buy) 2QFY11 PAT grew by 19% YoY to Rs12.4b (vs est of Rs11.6b). NII grew 11% QoQ to Rs22b driven by sequential growth in loan book and improvement in NIMs (up 10bp QoQ). Our estimates had not factored for merger impact of BOR, adjusted for the same NII and PAT growth would be 3-4% higher than our estimates. Impact of merger is for 49days in the quarter. There were no negative surprises on asset quality post merger with erstwhile Bank of Rajasthan (BoR); ICICI made provisions for employee related liabilities and increasing coverage ratio.
Key highlights
- Loans were up 5.3% QoQ and 1.8% YoY to Rs1.9t; (adjusted for merger, growth was 1.8% QoQ, in line with the industry trend), driven by higher disbursals in corporate segment. For FY11, it is targeting 18-20% growth in domestic operations.
- Margins improved 10bp QoQ to 2.6%; domestic margins improved 20bp QoQ to 3% while margins on international business remained stable 0.8%.
- CASA grew by 34.5% YoY to Rs981b (adjt growth of 33.9% YoY). While SA deposits grew 28% YoY (12% QoQ), CA deposits grew 48% YoY (24% QoQ). CASA ratio (calculated) has increased to 44% in 2QFY11 vs 42.1% at the end of 1QFY11. On an average daily basis, CASA ratio stood at 39% for 2QFY11.
- Fee income grew 14.6% YoY driven by higher income from corporate and international which grew by 20%+. Mgmt expects fee income growth to be in-line with the asset growth.
- Credit cost was down to 1.35% vs 1.75% in 1QFY11. Provisions charge during the quarter stood at Rs6.4b of which Rs4b was used for improving coverage ratio to 70%. With PCR at 69% and asset quality on an improving trend, NPA provisions will decline going ahead.
- ICICI Prudential Life Insurance reported a statutory profit of Rs0.2b; including surplus from non-participating policyholders funds, PAT would be at Rs2.7b.
Valuation and view: RoA to improve to 1.4%+, but low leverage (Tier I at ~12%) means core RoE remain ~14% by FY12
- ICICI Bank’s execution of its strategy of 5C’s i.e. Credit growth, CASA, Cost optimization, improving Credit profile and Customer service (replaced byCapital Conservation) for profitable growth is immaculate so far. Sustained accretion to savings deposits and revival in loan growth would drive NII and margins higher from current levels. Loan growth is now the key to ICICI Bank, given strong CASA, control over Opex, expected decline in credit costs and among the highest capitalizations.
- We model a decline of ~110bps in FY11 in credit cost (as a percentage of average loans) after factoring the impact of 70% provision coverage by FY11.
- Strong improvement in core operating performance and lower credit cost will lead to increase in RoA to 1.5% in 2HFY11 itself. We expect ICICI Bank to report core RoE of ~14% by FY12, with a strong Tier I CAR at ~12%. Our FY12 based SOTP is Rs1,270, an upside of 9%.
- We have upgraded our earnings estimates by 4% for FY11/12 to factor in BoR merger and lower credit cost. We expect ICICI Bank to report EPS of Rs46 in FY11 and Rs58 in FY12. BV would be Rs479 in FY11 and Rs516 in FY12. ABV (adjusted for investment in subs) would be Rs368 in FY11 and Rs405 in FY12. Adjusted for FY12 based subs value at Rs258/share (post 20% holding company discount), stock trades at 2.2x FY12E ABV (adjusted for investment in subs) and 15.6x FY12 EPS.
Detailed result analysis
No negative surprises from merger of Bank of Rajasthan
- During the quarter, BoR was merged with ICICI Bank and the reported results have the impact of merger for a period of 49 days.
- While there was skepticism about quality of assets acquired from BoR, the merger accounting does not reflect any negative surprises. Adjustments were made in terms of provisions for employee benefits, move to 70% provision cover on NPAs and deferred tax asset reversal in e-BoR books prior to merger.
- At the end of FY10, BoR networth stood at Rs9.6b, on which the bank has made provisions for 2nd Pension option, Reversal of DTA and increased coverage ratio to 70% which led to fall in Net worth to Rs3.6b. Further, to align gratuity liability to ICICI Bank pay scale, the bank took a hit of Rs2.7b leading to effective networth of Rs850m at the time of merger. During 2QFY11, bank had foreign currency translation revision of Rs1.6b.
- ICICI Bank had earlier guided for tax rate of 26% for FY11. However, with liabilities (mainly employee benefits) relating to merger materializing, effective tax rate for the year has been revised lower to 24%.
Loan growth improves, CASA performance remains convincing
- Loans were up 5.3% QoQ and 1.8% YoY to Rs1.9t; (adjusted for the merger growth was 1.8% QoQ, in line with the industry trend). The growth was driven by higher disbursals in corporate segment.
- For the year mgmt is targeting 18-20% growth in domestic operations. While the corporate loans would continue to be the key driver, lower deceleration in retail loans (decline of 9% YoY vs 21% in 1QFY11) would aid loan growth. Retail loans on a sequential basis have increased after 10 quarters.
- Deposits grew 11% QoQ to Rs2.2t (adjusted for the merger growth was 4% QoQ). CASA grew by 34.5% YoY to Rs981b (adjt growth of 33.9% YoY). While SA deposits grew 28% YoY (12% QoQ), CA deposits grew 48% YoY (24% QoQ).
- CASA ratio (calculated) has increased to 44% in 2QFY11 vs 42.1% at the end of 1QFY11. On an average daily basis, CASA ratio stood at 39% for 2QFY11.
Healthy trend in operating parameters
- NII grew 11% QoQ to Rs22b driven by sequential growth in loan book and improvement in NIMs. Margins improved 10bp QoQ to 2.6%; domestic margins improved 20bps QoQ to 3% while margins on international business remained stable 0.8%. Relatively low domestic CD ratio of 68% provides further room for margin improvement.
- Fee income grew 14.6% YoY driven by higher income from corporate and international which grew by 20%+. Mgmt expects fee income growth going ahead would be in line with the asset growth. Trading loss at Rs1.4b vs a profit of Rs1b a quarter ago and Rs3b a year ago
- Operating expenses increased 6% QoQ to Rs6.2b. Going ahead, mgmt expects opex in absolute terms to increase to reflect the full impact of branch addition over the last two quarters and merger related expenses. However as a part of its 5C strategy it expects to contain the cost to income ratio at the current levels of ~40%.
- We believe the bank’s focus of cutting the excess operating cost has already yielded the desired results; for the next phase growth, investment in people and brand building etc is must. With pick up in loan growth, other operating expenses are also likely to rise; we model in 20% opex growth over FY10-12.
Gross NPA increases QoQ (merger impact), credit cost declines, PCR reaches 69%
- Reported Gross NPAs increased 3% QoQ to Rs102b (Retail GNPAs of Rs68b). During the quarter, net additions to gross NPAs were on account of merger with BoR. In ICICI Bank’s books, net addition to GNPAs were almost Nil. During the quarter, the bank has written off assets worth Rs1.3b.
- Credit cost was down to 1.35% vs 1.75% during 1QFY11. With PCR at 69% and asset quality on an improving trend, NPA provisions will decline going ahead. (RBI has allowed ICICI to raise its PCR to 70% by 4QFY11). Mgmt is targeting credit cost to decline upto 1% and expects it to stabilize at those levels. Provision charge stood at Rs6.4b, of which Rs4b was used for improving coverage ratio to 70%.
- Restructured assets showed sharp improvement with outstanding assets declining to Rs26b (1.1% of the customer assets) compared to Rs37b (1.7% of the customer assets) at the end of 1QFY11.
Life insurance business reports profit, margins of 19%
- ICICI Prudential Life APE improved 11% YoY to Rs13.4b and NBAP margin remained stable at 18.9%. It reported a statutory profit of Rs0.2b however if surplus from non-participating policyholders funds would have transferred, PAT would be at Rs2.7b.
- AUM increased 31% YoY to Rs655b.
Performance of Overseas subsidiaries
- ICICI UK’s total assets increased 4% QoQ from USD6.9b to USD7.2b. ICICI UK’s profits declined to ~USD8.4m during 2QFY11 vs USD 9m earned in 1QFY11. CAR stood at 18.3%
- ICICI Canada’s total assets declined QoQ from CAD 5.2b to CAD 5b. Earnings were CAD7.6m in 2QFY11 vs CAD 6.5m in 1QFY11. CAR stood at 22.9%. Mgmt states that certain regulatory issues are impacting the growth in Canada
Adequately capitalized, Tier I ratio at 13.8%
- Capitalization of the bank remains one of the best in the industry with the Tier I ratio at 13.8%; As loan growth is likely to remain at 16%+ and earnings momentum to be strong (~28% CAGR over FY11-12), we expect bank to maintain superior Tier I ratio of 12%+ by FY12
Maintain Buy
- We have upgraded our earning estimates by 4% for FY11/12 to factor in BoR merger and lower credit cost. We expect ICICI Bank to report EPS of Rs46 in FY11 and Rs58 in FY12. BV would be Rs479 in FY11 and Rs516 in FY12. ABV (adjusted for investment in subs) would be Rs368 in FY11 and Rs405 in FY12.
- Adjusted for FY12 based subs value at Rs258/share (post 20% holding company discount), stock trades at 2.2x FY12E ABV (adjusted for investment in subs) and 15.6x FY12 EPS.
- We expect ICICI Bank to report core RoE of 14% by FY12, with a Tier I strong at ~12%. Our FY12 based SOTP is Rs1270 (rounded off), an upside of 9%.
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