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ICICI Bank’s net profit grew a healthy 18.9% yoy, which was above our estimates
mainly on account of higher NIMs and lower effective tax rate. The key positive of
the results was continuation of declining trend in net additions in gross NPAs from
retail loans (almost nil) for the sixth consecutive quarter and a substantial
reduction in NPA provisioning burden. We maintain a Buy on the stock.
Transformation done, time to grow: Excluding Bank of Rajasthan (BoR) numbers,
advances grew 1.8% qoq and deposits increased 4.3% qoq. The growth in
advances was driven by a 26.4% qoq and 35.7% yoy growth in corporate
lending. CASA deposits (excluding BoR) witnessed impressive growth of 10.4%
qoq and 28.1% yoy. The CASA ratio further improved to 44.0% (excluding BoR at
44.6%) from 42.1% in 1QFY2011 and 36.9% in 2QFY2010. Reported NIM
improved by 10bp qoq and yoy to 2.6%. Net addition in gross NPAs from retail
loans was almost nil from `200cr in 1QFY2011. The provision coverage ratio (as
per RBI guidelines) improved to 69.0% in 2QFY2011 (64.8% in 1QFY2011).
Outlook and Valuation: The bank’s strategies of the last eighteen months has
yielded a substantial improvement in the ratio of branches to net worth that is
expected to ensure a far more favourable deposit mix going forward. Moreover, a
lower risk balance sheet is expected to drive down NPA provisioning costs that we
believe will enable RoE of 15.6% by FY2012E (with further upside from financial
leverage). At the CMP, the bank’s core banking business (after adjusting
`254/share towards value of the subsidiaries) is trading at 2.4x FY2012E ABV of
`372.8 (including subsidiaries, the stock is trading at 2.3x FY2012E ABV of `508).
We value the bank’s subsidiaries at `254/share and the core bank at
`1,081/share (2.9x FY2012E ABV). We maintain a Buy on the stock, with a Target
Price of `1,335, implying an upside of 15.0% from current levels.
Advances and deposits growth picking up
The advances increased 5.3% qoq and 1.8% yoy to `1,94,201cr, while total
deposits grew 11.0% qoq and 12.8% yoy to `2,23,094cr during 2QFY2011.
Excluding the advances and deposits of Bank of Rajasthan (BoR) as of merger
date, advances grew 1.8% qoq but declined 1.7% yoy, while deposits increased
4.3% qoq and 6.0% yoy. The growth in advances was driven by a 26.4% qoq and
35.7% yoy growth in corporate lending. On the positive side, the decline in retail
segment which accounts for 39% of the advances book has been arrested
sequentially (growing by 2.8% qoq) though it de-grew by 9.6% yoy. Retail
segment’s contribution to the advances book has come down from 45% as of
2QFY2010 to 39% as of 2QFY2011, while at the same time contribution of the
corporate segment has risen from 18% to 24%.
On the deposits side, CASA deposits showed strong traction, growing 15.9% qoq
and 34.5% yoy to `98,105cr. Even excluding CASA deposits of BoR as of merger
date, the CASA deposits witnessed impressive growth of 10.4% qoq and 28.1%
yoy. Consequently, the CASA ratio further improved to 44.0% from 42.1% in
1QFY2011 and 36.9% in 2QFY2010. The reported NIM improved by 10bp qoq
and yoy to 2.6%.
However, an important reason for the bank’s moderate NIM improvement of 10bp
on a yoy basis in spite of substantially improved CASA ratio is the lower risk profile
of the bank’s loan book. We expect this reduction in risk (and consequent lower
yield on advances) to result in a 68bp decline in NPA provisioning costs by FY2012
eventually reflecting in an improvement in RoA from 1.0% to 1.4% over
FY2010-12E, commensurate with the improvement in the CASA ratio.
Non-interest income growth moderate
Non-interest income fell by 6.1% qoq and 13.5% yoy to `1,578cr on account of
treasury losses of `144cr compared to gains of `297cr in the 2QFY2010. Core fee
income grew 14.6% yoy to `1,590cr. Growth in fee income of corporate and
international segment was robust, while fee income from the retail segment
declined on a yoy basis and remained flat sequentially. Management expects to
stem the decline in retail fee income in the coming quarters. Management also
expects fee income to grow in line with advances growth.
Asset quality improving; further lower provisioning cost expected
The bank’s asset quality showed further improvement, with a sharp declining trend
in net addition to gross NPAs from retail loans was almost nil during 2QFY2011
from ~`200cr in 1QFY2011. Absolute gross NPAs increased 3.2% sequentially to
`10,141cr primarily due to ~`400cr gross NPAs of BoR. Net addition to gross
NPAs in both retail and corporate segments was close to nil. The bank’s gross NPA
ratio improved from 5.1% as of 1QFY2011 to 5.0% as of 2QFY2011.
The provision coverage ratio (as per RBI guidelines) improved to 69.0% in
2QFY2011 from 64.8% in 1QFY2011. The RBI had extended the deadline to meet
the coverage ratio requirement of 70% from September 30, 2010 to March 31,
2011; the bank looks well positioned to achieve the same well before the
deadline. The bank’s restructured loans continued their sharp fall, declining by
30.9% sequentially to `2,578cr from `3,737cr in 1QFY2011. The cumulative
restructuring of loans for the bank is also one of the lowest in the sector at 1.3% of
total loans and 4.8% of net worth. We have factored in NPA provisions to decline
by 37.7% in FY2011 and 15.3% in FY2012.
Operating expenses under control
Driven by a 38.9% yoy rise in employee expenses, total operating expenses rose by
10.2% yoy to `1,570cr. However, the cost-to-income ratio deteriorated to 41.5% in
2QFY2011 as compared to 40.4% in 1QFY2011 and 36.9% in 2QFY2010 due to
the moderate operating performance. Management expects to restrict the
operating cost-to-asset ratio to 1.6% and cost-to-income ratio to below 40%.
Strong capital adequacy
Driven by its large net worth, capital adequacy continued to be strong at 20.2%,
comprising substantial tier-1 component of 13.8%. We believe that with this the
bank is well positioned for the imminent improvement in credit growth, as the GDP
outlook continues to improve.
Under-leveraged branch network
With the merger of BoR, the bank enjoys a strong pan-India network of 2,500+
branches. The number of branches has grown at a strong pace over the past three
years. This extensive network is under-leveraged as of now, reflected in the falling
CASA deposits/branch of ~`39cr compared to `65cr as of 3QFY2008 and the
total assets/branch of `156cr compared to `394cr as of 3QFY2008.
Further, management is planning to take the branch network to ~4,000 branches
over the next 3 years (FY2014) in a phased manner @~500 branches each year.
Going forward, we expect the bank to leverage this network to grow its CASA
market share.
Merger of Bank of Rajasthan
During the quarter, the bank completed the merger of BoR with itself. BoR had
total assets of `15,596cr, advances of `6,528cr and deposits of `13,483cr
includes CASA deposits of `4,680cr as of the merger date (August 12, 2010).
Net worth of BoR as of merger date was `356cr compared to `937cr at the end of
FY2010 reflecting primarily provisions for employee benefits, move to 70%
provision cover on NPAs and deferred tax asset reversal in BoR books prior to
merger. The bank also carried out fair valuation adjustment of `270cr through
reserves on account of merger, primarily to account for impact of alignment to
ICICI Bank pay scale on gratuity liability and mark-to-market on HTM investment
portfolio.
On account of the merger, the bank’s tax rate for the quarter was 21.3% and the
management expects tax rate to be ~24% for FY2011.
Overview of overseas banking subsidiaries
ICICI Bank, UK’s PAT fell to US $8.4mn in 2QFY2011 from US $12.6mn in
2QFY2010. ICICI Bank UK’s capital position continued to be strong, with a capital
adequacy ratio of 18.3% as at 2QFY2011.
Overview of insurance subsidiaries
ICICI Life maintained its position as the largest private sector life insurer based on
retail new business weighted received premium during 1HFY2011. ICICI Life’s new
business annualised premium equivalent (APE) increased 10.9% to `1,344cr in
2QFY2011 from `1,212cr in 2QFY2010. ICICI Life’s renewal premium in
2QFY2011 was `2,264cr. ICICI Life’s unaudited new business profit (NBP)
increased 9.0% to `254cr in 2QFY2011 from `233cr in 2QFY2010. Assets held
increased 30.7% to `65,484cr as of 2QFY2011 from `50,093cr at 2QFY2010.
ICICI General’s premium income grew 36.2% yoy in 2QFY2011 to `1,091cr.
ICICI General’s profit after tax showed strong traction, increasing by 103.4% yoy
to `104cr in 2QFY2011 from `51cr in 2QFY2010.
Overview of the Securities and AMC business
ICICI Prudential Asset Management Company’s PAT dipped sharply by 70.8% yoy
to `14cr (`48cr) in 2QFY2011. ICICI Securities’ PAT declined 23.7% to `29cr
(`38cr) in 2QFY2011.
Overall, the bank’s consolidated profit after tax increased 21.8% yoy to `1,395cr
in 2QFY2011 from `1,145cr in 2QFY2010.
Investment Arguments
Well-positioned to garner strong market share gains in CASA
deposits
In our view, the bank’s substantial branch expansion from 955 branches at the
end of 3QFY2008 to ~2,500 branches by 2QFY2011 as well as strong capital
adequacy at 20.2% (Tier-I at 13.8%) have positioned it to gain CASA and credit
market share, respectively. In fact, the bank has once again started gaining market
share in savings accounts. During FY2010, the bank improved its market share of
savings deposits by 10bp over FY2009, capturing a substantial 5.4% incremental
market share.
Improved deposit mix to reflect in NIMs sustainability
The bank’s strategic transformation is expected to drive significantly better balance
sheet and earnings quality, taking RoEs from 9.7% in FY2010 to 15.6% in
FY2012E. The distinguishing feature of the bank’s performance in FY2010 was the
improvement in CASA ratio to 42.1% (transformative considering that the ratio was
as low as 22% at the end of FY2007 and 29% even as recently as FY2009). The
CASA ratio has further improved to 44.0% during the 2QFY2011. In light of this
change in the liability mix, even in a rising interest rate scenario, we expect the
bank’s NIMs to sustain at 2.5-2.6% levels over FY2011-12 (2.4% in FY2010).
Apart from the paradigm shift in the deposit mix reflected in its 44% CASA ratio,
the bank has also largely exited unattractive business segments such as small-ticket
personal loans in the domestic segment and most non-India related exposures in
its international business, focusing again on replacing wholesale funds with retail
deposits in the international subsidiaries as well.
Worst of asset quality issues over
The bank’s asset quality showed further improvement, with a sharp declining trend
in slippages in retail loans, which fell from ~`200cr in 1QFY2011 to almost nil net
addition during 2QFY2011. Also, the bank has already reached pretty close to
achieving the 70% provision coverage ratio. The bank’s restructured loans
continued their sharp fall, declining by 30.9% sequentially to `2,578cr from
`3,737cr in 1QFY2011. The cumulative restructuring of loans for the bank is also
one of the lowest in the sector at 1.3% of total loans and 4.8% of net worth. We
have factored in NPA provisions to decline by 37.7% in FY2011E and 15.3% in
FY2012E.
We expect the reduction in risk profile of advances (and consequent lower yield on
advances), to result in a 68bp decline in NPA provisioning costs by 2012E
eventually reflecting in an improvement in RoA from 1.0% to 1.4% over FY10-12E,
commensurate with the improvement in CASA ratio.
Valuations attractive
We have a positive view on ICICI Bank, given its market-leading businesses across
the financial services spectrum. Moreover, we believe that the bank is decisively
executing a credible strategy of consolidation that has resulted in an improved
deposit and loan mix, and should drive improved operating metrics over the
medium term. The bank’s strategies of the last eighteen months has yielded a
substantial improvement in the ratio of branches to net worth that is expected to
ensure a far more favourable deposit mix going forward. Moreover, a lower risk
balance sheet is expected to drive down NPA provisioning costs that we believe will
enable RoE of 15.6% by FY2012E (with further upside from financial leverage).
At the CMP, the bank’s core banking business (after adjusting `254/share towards
value of the subsidiaries) is trading at 2.4x FY2012E ABV of `372.8 (including
subsidiaries, the stock is trading at 2.3x FY2012E ABV of `508). We value the
bank’s subsidiaries at `254/share and the core bank at `1,081/share (2.9x
FY2012E ABV). We maintain a Buy on the stock, with a Target Price of `1,335,
implying an upside of 15.0% from current levels.
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