ICICI Bank -Strong results but low ROEs to cap upside:: Religare

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ICICI Bank
Strong results but low ROEs to cap upside


ICICI Bank (ICICIBC) reported strong Q2FY11 results marked by improvement in
both, asset quality and NIMs and a revival in core fee income. Although the bank’s
gross NPAs increased marginally (in absolute terms), this was mainly due to its
merger with Bank of Rajasthan (BOR), effective from 12 Aug ’10; net addition to
ICICIBC’s core book was minimal. NIMs improved 10bps QoQ due to higher
margins from international operations. Growth in core fee income was strong at
13% QoQ led by international and corporate segments. While growth in advances
was sluggish, the management has guided to a strong pick up in H2FY11.
The management has now included growth as a part of its strategy and dropped
capital conservation from its ‘4C’ strategy outlined earlier. Accordingly, we expect
credit/earnings growth of 20%/27% CAGR FY10-FY13E. However, we believe
that the near-term upside in the stock from current levels is capped, given a) the
stock rally seen in the past three months and b) the bank’s lower ROE vis-à-vis
peers. Maintain HOLD with a revised target price of Rs 1,175.
Asset quality continues to improve: ICICIBC’s gross NPAs, in absolute terms, increased
by Rs 3bn to Rs 101bn (5% of advances, Fig 4); however, this was primarily due its
merger with BOR. ICICIBC increased its provisioning coverage to from 65% in Q1FY11
to 69% in Q2FY11; consequently, net NPAs declined by Rs 3bn to Rs 31.5bn (1.6% of
advances). Total provisions also declined from Rs 8bn in Q1FY11 and Rs 10.7bn in
Q2FY10 to Rs 6.4bn in Q2FY11, despite a higher provisioning coverage.
Advances growth still sluggish but retail book looking up: Growth in advances
(after adjusting for advances of ~ Rs 65bn coming in from BOR) was at only at
~1.8% QoQ due to lower growth in the rural and unsecured retail loan portfolios.
However, credit offtake in the corporate and housing segments continued to
improve. After consolidating its balance sheet, ICICIBC is now focusing on
increasing its advances and targeting a growth rate of 16%-18% in FY11. Its
international book is also expected to grow in single digits due to strong demand
from the corporate segment. NIMs improved by 10bps QoQ to 2.6% due to
higher margins from international operations. NIMs for the domestic operations
were maintained at 3%.
Core fee income strong; costs up on higher employee expenses: Core fee income
was strong (up 15% YoY, 13% QoQ) driven by international and corporate
segments. Retail fee income continued to decline due to lower fee generated from
credit card and personal loan businesses. However, total non-interest income
slipped 8% YoY due to an MTM loss of Rs 1.4bn (as against a profit of Rs 3bn in
Q2FY10). C/I ratio increased to 41.5% from 40.4% last quarter as employee
expenses jumped 39% YoY due to salary hikes and the BOR merger.