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ICICI Bank (ICICIBC)
Banks/Financial Institutions
Stable quarter; earnings driven by lower provisions. ICICI Bank reported in-line
results with stable margins at 2.6% and loan growth at 15% yoy. As expected, NPLs
have declined resulting in lower requirement on provisions, driving earnings growth at
31% yoy. However, we are somewhat disappointed with the margin outlook
(management expects it to decline) especially on a relative basis, as most other banks
are witnessing an improvement. Valuations have turned reasonable at 1.9XFY2012E
(adjusted) PBR. Retain ADD with a TP of `1,230.
Lower provisions emerging as key driver of profitability
ICICI Bank reported a steady quarter, with a 6% qoq growth in loan book and stable margins.
Earnings were largely driven by lower provisions as new NPL formation was negligible. We expect
a similar trend to continue in FY2012E as well. While we expect margins to improve on the back of
higher interest rates and a reasonably strong liability profile now (CASA at 44%, average CASA at
39% in 3Q), the management is cautious guiding for lower margins for 4Q and stable margins
next year, on the back of rising deposit costs. Post the recent decline in stock price of 15% from
peak levels, valuations have become more reasonable. Stock currently trades at 1.9X FY2012E PBR.
The likely RoE for the standalone bank is likely to be 15% by FY2013E. While we view this stock as
more of a defensive one with low risk (especially on NPLs and profitability), we believe that upsides
are also likely to be capped, on the back of lower RoEs likely to be delivered. Our TP on ICICI Bank
remains at `1,230, which offers a 15% upside from current levels.
Loan book grows by 6% qoq (standalone); 15% yoy growth on a low base and impact of BoR
Loans grew by 6% qoq (14% YTD), lower than industry trend of 10%, to `2.07 tn as of December
2010. Yoy growth is higher at 15% on a low base and impact of BoR in current numbers.
Incremental growth was mainly driven by corporate segment on the domestic front, which grew
by 49% yoy and 14% qoq. Retail loans just grew by 1% qoq and declined 2% yoy – mortgages
grew by 7% yoy. Retail disbursements were `71 bn, which is lower than `78 bn in 2Q, as the
management highlighted that higher interest rates have started to have some impact on retail loan
growth. We expect loan book to grow by 20% CAGR in FY2011-12E.
Margins stable at 2.6% with benefit coming from improvement in CD ratio
Margins have been stable at 2.6% for the quarter despite rising cost of funds as the bank
benefitted from expansion in CD ratio. Surprisingly, lending yields have been relatively flat
for three quarters consistently at about 8.3% despite underlying environment, suggesting an
improvement and the bank’s overall portfolio of unsecured loans being flat at 3% of loans.
Management indicated that loans, despite being floating in nature, re-price at specific
intervals. Cost of funds (KS calc.) has increased by 20 bps qoq to 5.5%. We are building
margins to improve by 10 bps each in FY2012-13E on the back of re-pricing of loans,
improving liability profile, shift in composition of domestic and improved pricing of
international loans.
CASA ratio stable at 44%; poised to maintain at current levels
Deposits growth was a bit disappointing and was low at 10% yoy (2% decline qoq) to `2.2
tn aided somewhat by the merger. Unadjusted for the merger, deposits grew by 3% yoy.
CASA ratio for the quarter has been stable at 44% qoq. CASA deposits grew strongly by
23% yoy, led by strong growth in savings deposits. Post merger, ICICI Bank has increased its
branch network to 2,512 (11 branches added during the quarter) with a 3-year target of
4,000 branches. We maintain a favorable outlook on the bank’s CASA ratio as productivity
improves of not only for BoR branches but also those opened in the past three years (700
branches since FY2008).
Non-interest income grew 5%; fee growth higher at 14%
Non-interest income grew 5% yoy but core fee income grew higher at 14% yoy. The
management highlighted that retail fees have stabilized while the growth for the quarter
was driven by higher contribution from corporate and international business. Retail fees
were 50% of total fees. The bank reported a treasury income of `210 mn compared to a
loss of `1.4 bn. We are building fee income to grow by 16% CAGR in FY2012-13E on the
back of higher loan growth.
Asset quality stable post merger; coverage crosses 70%
The quarter saw ICICI Bank meeting RBI’s regulatory requirements of 70% coverage ratio
(72% in 3QFY11) – this should help lower provisioning charges and aid earnings going
forward. The bank made provisions of `4.6 bn largely towards NPLs and, consequently, net
NPLs declined to `29 bn (net NPL down to 1.4% from 1.6% qoq). Provisions will broadly
track net slippages and given the subdued business growth in recent years, we expect this to
decline further over the next few quarters. Loan loss provisions are currently at about 1% of
loans and we expect it to decline to 0.8% in FY2012-13E.
Reported gross NPLs were flat qoq at `102 bn (4.8% of advances). Restructured assets were
stable at `26 bn (1.3% of loans). The management highlighted that `6 bn of additional
restructuring was done and there were upgradations of `6 bn out of the restructured pool.
Cost-income flat at 42% qoq; employee expenses on the rise
Cost-income ratio was flat at 42%, lower than industry average, but recent quarters has
witnessed higher provisions for salary. Salary expenses have increased by 78% yoy (22%
qoq growth), as the bank made higher bonus provisions during the quarter. Non-staff
expenses were flat at `9.2 bn. Opex to assets at 1.7% in 3Q is one of the best amongst
private banks. We, however, expect costs to grow by about 20% CAGR over the next
couple of years on the back of higher business activity and rising wage levels.
ICICI Pru Life: Growth and margins decline under new regime
The insurance business suffered during 3Q, as this was the first quarter post deregulations
and focus remained on correcting their cost base rather than business growth. ICICI Pru
Life’s APE declined by 61% yoy to `6 bn in 3QFY11. Reported NBAP margin also declined to
17.6% for 3QFY11, resulting in a 65% yoy decline in NBAP to `1 bn. Renewal premiums fell
by 2% yoy reflecting higher surrenders/lapsation. ICICI Pru Life reported a strong profit of
`5.1 bn, mainly on account of transfer of surplus in the non-participating policy holders’
funds, as per the recent IRDA circular. Earlier, this was done at the end of the fiscal.
Consolidated profits up 77% yoy, driven by life insurance business
Consolidated net profits reported a strong growth of 77% to `20.4 bn supported by profits
contribution mainly from life insurance business (due to the transfer of `5.8 bn of surplus
being transferred, ICICI Bank’s share was `3.8 bn). In International subsidiaries—UK has
seen a marginal increase in total assets while Canada continues to decline. RoEs, however, in
international subsidiaries, remain below par.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank (ICICIBC)
Banks/Financial Institutions
Stable quarter; earnings driven by lower provisions. ICICI Bank reported in-line
results with stable margins at 2.6% and loan growth at 15% yoy. As expected, NPLs
have declined resulting in lower requirement on provisions, driving earnings growth at
31% yoy. However, we are somewhat disappointed with the margin outlook
(management expects it to decline) especially on a relative basis, as most other banks
are witnessing an improvement. Valuations have turned reasonable at 1.9XFY2012E
(adjusted) PBR. Retain ADD with a TP of `1,230.
Lower provisions emerging as key driver of profitability
ICICI Bank reported a steady quarter, with a 6% qoq growth in loan book and stable margins.
Earnings were largely driven by lower provisions as new NPL formation was negligible. We expect
a similar trend to continue in FY2012E as well. While we expect margins to improve on the back of
higher interest rates and a reasonably strong liability profile now (CASA at 44%, average CASA at
39% in 3Q), the management is cautious guiding for lower margins for 4Q and stable margins
next year, on the back of rising deposit costs. Post the recent decline in stock price of 15% from
peak levels, valuations have become more reasonable. Stock currently trades at 1.9X FY2012E PBR.
The likely RoE for the standalone bank is likely to be 15% by FY2013E. While we view this stock as
more of a defensive one with low risk (especially on NPLs and profitability), we believe that upsides
are also likely to be capped, on the back of lower RoEs likely to be delivered. Our TP on ICICI Bank
remains at `1,230, which offers a 15% upside from current levels.
Loan book grows by 6% qoq (standalone); 15% yoy growth on a low base and impact of BoR
Loans grew by 6% qoq (14% YTD), lower than industry trend of 10%, to `2.07 tn as of December
2010. Yoy growth is higher at 15% on a low base and impact of BoR in current numbers.
Incremental growth was mainly driven by corporate segment on the domestic front, which grew
by 49% yoy and 14% qoq. Retail loans just grew by 1% qoq and declined 2% yoy – mortgages
grew by 7% yoy. Retail disbursements were `71 bn, which is lower than `78 bn in 2Q, as the
management highlighted that higher interest rates have started to have some impact on retail loan
growth. We expect loan book to grow by 20% CAGR in FY2011-12E.
Margins stable at 2.6% with benefit coming from improvement in CD ratio
Margins have been stable at 2.6% for the quarter despite rising cost of funds as the bank
benefitted from expansion in CD ratio. Surprisingly, lending yields have been relatively flat
for three quarters consistently at about 8.3% despite underlying environment, suggesting an
improvement and the bank’s overall portfolio of unsecured loans being flat at 3% of loans.
Management indicated that loans, despite being floating in nature, re-price at specific
intervals. Cost of funds (KS calc.) has increased by 20 bps qoq to 5.5%. We are building
margins to improve by 10 bps each in FY2012-13E on the back of re-pricing of loans,
improving liability profile, shift in composition of domestic and improved pricing of
international loans.
CASA ratio stable at 44%; poised to maintain at current levels
Deposits growth was a bit disappointing and was low at 10% yoy (2% decline qoq) to `2.2
tn aided somewhat by the merger. Unadjusted for the merger, deposits grew by 3% yoy.
CASA ratio for the quarter has been stable at 44% qoq. CASA deposits grew strongly by
23% yoy, led by strong growth in savings deposits. Post merger, ICICI Bank has increased its
branch network to 2,512 (11 branches added during the quarter) with a 3-year target of
4,000 branches. We maintain a favorable outlook on the bank’s CASA ratio as productivity
improves of not only for BoR branches but also those opened in the past three years (700
branches since FY2008).
Non-interest income grew 5%; fee growth higher at 14%
Non-interest income grew 5% yoy but core fee income grew higher at 14% yoy. The
management highlighted that retail fees have stabilized while the growth for the quarter
was driven by higher contribution from corporate and international business. Retail fees
were 50% of total fees. The bank reported a treasury income of `210 mn compared to a
loss of `1.4 bn. We are building fee income to grow by 16% CAGR in FY2012-13E on the
back of higher loan growth.
Asset quality stable post merger; coverage crosses 70%
The quarter saw ICICI Bank meeting RBI’s regulatory requirements of 70% coverage ratio
(72% in 3QFY11) – this should help lower provisioning charges and aid earnings going
forward. The bank made provisions of `4.6 bn largely towards NPLs and, consequently, net
NPLs declined to `29 bn (net NPL down to 1.4% from 1.6% qoq). Provisions will broadly
track net slippages and given the subdued business growth in recent years, we expect this to
decline further over the next few quarters. Loan loss provisions are currently at about 1% of
loans and we expect it to decline to 0.8% in FY2012-13E.
Reported gross NPLs were flat qoq at `102 bn (4.8% of advances). Restructured assets were
stable at `26 bn (1.3% of loans). The management highlighted that `6 bn of additional
restructuring was done and there were upgradations of `6 bn out of the restructured pool.
Cost-income flat at 42% qoq; employee expenses on the rise
Cost-income ratio was flat at 42%, lower than industry average, but recent quarters has
witnessed higher provisions for salary. Salary expenses have increased by 78% yoy (22%
qoq growth), as the bank made higher bonus provisions during the quarter. Non-staff
expenses were flat at `9.2 bn. Opex to assets at 1.7% in 3Q is one of the best amongst
private banks. We, however, expect costs to grow by about 20% CAGR over the next
couple of years on the back of higher business activity and rising wage levels.
ICICI Pru Life: Growth and margins decline under new regime
The insurance business suffered during 3Q, as this was the first quarter post deregulations
and focus remained on correcting their cost base rather than business growth. ICICI Pru
Life’s APE declined by 61% yoy to `6 bn in 3QFY11. Reported NBAP margin also declined to
17.6% for 3QFY11, resulting in a 65% yoy decline in NBAP to `1 bn. Renewal premiums fell
by 2% yoy reflecting higher surrenders/lapsation. ICICI Pru Life reported a strong profit of
`5.1 bn, mainly on account of transfer of surplus in the non-participating policy holders’
funds, as per the recent IRDA circular. Earlier, this was done at the end of the fiscal.
Consolidated profits up 77% yoy, driven by life insurance business
Consolidated net profits reported a strong growth of 77% to `20.4 bn supported by profits
contribution mainly from life insurance business (due to the transfer of `5.8 bn of surplus
being transferred, ICICI Bank’s share was `3.8 bn). In International subsidiaries—UK has
seen a marginal increase in total assets while Canada continues to decline. RoEs, however, in
international subsidiaries, remain below par.
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