Buy ICICI Bank – 3QFY2011 Result Update - Angel Broking

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

  ICICI Bank – 3QFY2011 Result Update

           Angel Broking maintains a Buy on ICIC Bank with a Target Price of Rs. 1,312.

For 3QFY2011, ICICI Bank’s standalone net profit grew by healthy 16.2% qoq

and 30.5% yoy to `1,437cr, above our estimates, mainly on account of lower

provisioning expenses. The key positive of the results was healthy traction in loan

book and a substantial reduction in NPA provisioning burden. We maintain our

Buy recommendation on the stock.

Healthy advances momentum and continuation of improvement in asset quality:

During 3QFY2011, the bank’s advances increased by healthy 6.4% qoq (the

highest in the past 14 quarters). Deposits declined by 2.4% qoq on account of

lower IPO floats. CASA deposits showed healthy traction, growing at 23.0% yoy

on the back of a 26.5% yoy increase in savings account deposits. CASA ratio

further improved by 20bp qoq to 44.2%. Reported NIM was flattish sequentially

as well as yoy at 2.6%. Employee expenses were on the higher side on account of

provisions for bonus, leading to an increase in cost-to-income ratio to 42.3%

from 41.5% in 2QFY2011. Gross NPAs increased marginally by 0.4% qoq, while

net NPAs continue to witness a decline. The provision coverage ratio (as per the

RBI’s guidelines) improved to 71.8% in 3QFY2011 from 69.0% in 2QFY2011.

Outlook and valuation: The bank’s strategies over the last 18 months have

yielded a substantial improvement in the ratio of branches to net worth; this is

expected to sustain a far more favourable deposit mix going forward. Moreover,

a lower risk balance sheet is expected to drive down NPA provisioning costs,

which we believe will enable RoE of 15.8% by FY2012E (with further upside from

financial leverage). At the CMP, the bank’s core banking business (after adjusting

`204/share towards value of the subsidiaries) is trading at 2.4x FY2012E ABV

(including subsidiaries, the stock is trading at 2.2x FY2012E ABV). We value the

bank’s subsidiaries at `204/share and the core bank at `1,108/share (3.0x

FY2012E ABV). We maintain Buy on the stock with a Target Price of `1,312.

Advances show traction, deposits growth a bit muted

During 3QFY2011, the bank’s advances increased by healthy 6.4% qoq, which

was the highest in the past 14 quarters. Sequential growth in advances was led by

the corporates (14.4%), rural (12.5%) and SME (11.8%), while the personal loans

and other retail loans segments continued to witness declines.

On a yoy basis, credit growth stood at 15.3%, which was mainly contributed by the

corporates (growing 65.3%), MSE (growing 21.9%) and rural advances (growing

21.1%), while retail advances declined by 2.1% yoy on account of a 55.3% and

34.8% decrease in personal loans and credit cards, respectively. The retail

segment’s contribution to the advances book came down to 38% as of 3QFY2011

from 45% as of 3QFY2010; while, at the same time, contribution of the corporate

segment rose to 26% from 18%.

Sequential deposits growth was a bit muted, with deposits declining by 2.4% qoq

and rising by 10.2% yoy. CASA deposits showed healthy traction, growing at

23.0% yoy on the back of a 26.5% yoy increase in savings account deposits and

16.5% yoy growth in current account deposits. Current account deposits declined

by ~9% due to lower floats from primary offerings as compared to 2QFY2011.

The CASA ratio improved to 44.2% in 3QFY2011 from 39.6% in 3QFY2010.

Reported NIM was flat sequentially as well as on a yoy basis at 2.6%. Both,

domestic and overseas NIMs remained stable at ~3% and ~0.85%, respectively.

However, an important reason for the bank’s steady NIMs (as compared to other

banks’ expanding their NIMs by 5–20bp sequentially), in spite of substantially

improved CASA ratio, is the reduction risk profile of the bank’s loan book. We

expect this reduction in risk (and the consequent lower yield on advances) to result

in a 80bp decline in NPA provisioning costs by FY2012, eventually reflecting in an

improvement in RoA from 1.0% to 1.5% over FY2010–12E, commensurate with the

improvement in the CASA ratio.

The bank expects to achieve credit growth of 18% for FY2011, which translates

into marginal 0.8% qoq growth for 4QFY2011, as management is expecting a

good chunk of short-term loans to be repaid. The management has also guided

for moderate near-term pressures on domestic NIMs due to rising cost of funds

and for a longer-term, gradual improvement in overseas NIMs to 1.25%

Non-interest income growth muted

During 3QFY2011, non-interest income increased by 10.8% qoq and by a

sluggish 4.5% yoy to `1,749cr. The slow yoy growth in non-interest income can be

attributed to the higher base in 3QFY2010, which included profit of ~`203cr on

account of transfer of merchant acquiring operations to the new entity. Core fee

income grew by 14.3% yoy to `1,625cr. Growth in fee income of the corporate

and international segments was robust, while fee income from the retail segment

declined on a yoy basis and remained flat sequentially. As a % of assets, fee

income remains amongst the highest in the sector at 1.7% (annualised).

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

The bank’s asset quality showed further improvement during 3QFY2011, with

gross NPAs increasing just marginally by 0.4% qoq. Net NPAs declined sharply

from the peak of `4,608cr in 1QFY2010 to `2,873cr in 3QFY2011. Sequentially,

the gross NPA ratio improved to 4.8% as of 3QFY2011 from 5.0% as of

2QFY2011, while net NPA ratio declined to 1.2% from 1.6% as of 2QFY2011. The

provision coverage ratio (as per the RBI’s guidelines) improved to 71.8% in

3QFY2011 from 69.0% in 2QFY2011. The bank’s exposure to Micro Finance

Institutions (MFIs) fell to `1,800cr from `2,400cr as of 2QFY2011.

The bank is not seeing any stress on this portfolio.

The bank’s restructured loans continued to fall during the quarter, declining by

52.0% yoy to `2,562cr from `5,338cr in 3QFY2010. The bank restructured loans

of ~`600cr during the quarter, which were set off by deductions on account of

upgradations. The cumulative restructuring of loans for the bank stood at 1.2% of

total loans and 4.6% of net worth. We have factored in NPA provisions to decline

by 47.1% in FY2011 and 16.4% in FY2012.

Provisioning expenses for the quarter declined substantially by 27.6% qoq and

53.7% yoy to `464cr mainly on account of improving asset quality. The bank

adjusted provisions on account of teaser loans against the excess standard assets

provisions.

Staff expenses rise on account of provision for bonus

During 3QFY2011, operating expenses grew by 9.4% qoq on account of a 21.8%

qoq increase in employee expenses, which was due to provision for bonus and

complete effect of employee additions. Going forward, management expects

quarterly employee expenses run rate of ~`700-750cr to continue.

Other operating expenses were flat sequentially as well as on a yoy basis.

The cost-to-income ratio rose to 42.3% in 3QFY2011 as compared to 41.5% in

2QFY2011 and 36.5% in 3QFY2010 due to higher employee expenses.

Management expects to restrict the operating cost-to-asset ratio to 1.7% and

cost-to-income ratio to below 40%.

Strong capital adequacy

Driven by its large net worth, capital adequacy continued to be strong at 20.0%,

comprising substantial tier-1 component of 13.7%. We believe with this the bank is

well positioned to take advantage of the strong credit demand.

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, as 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 three years (FY2014) in a phased manner at ~500 branches each

year. Going forward, we expect the bank to leverage this network to grow its CASA

market share.

Overview of overseas banking subsidiaries

ICICI Bank UK’s PAT increased to US $10.9mn in 3QFY2011 from US $7.3mn in

3QFY2010. ICICI Bank UK’s capital position continued to be strong, with a capital

adequacy ratio of 21.2% as of 3QFY2011.

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 April–November 2010.

ICICI Life’s new business annualised premium equivalent (APE) for 9MFY2011

decreased by 7.0% to `3,097cr. ICICI Life’s renewal premium in 9MFY2011 was

`6,674cr. ICICI Life’s new business profit (NBP) declined by 8.5% to `579cr. Assets

under management increased by 23.7% to `66,334cr as of 3QFY2011 from

`53,619cr as of 3QFY2010.

ICICI General’s gross premium income for 9MFY2011 grew by 29.4% yoy to

`3,250cr. ICICI General’s profit after tax for 9MFY2011 showed strong traction,

increasing by 59.1% yoy to `210cr.

Overview of the Securities and AMC business

ICICI Prudential Asset Management Company’s PAT dipped sharply by ~85.0%

yoy to `6cr (`40cr) in 3QFY2011.

ICICI Securities’ PAT declined by ~5% yoy to `35cr (`37cr) in 3QFY2011.

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 and strong capital

adequacy at 20% (Tier-I at 13.7%) 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 lead to better NIMs

The bank’s strategic transformation is expected to drive significantly better balance

sheet and earnings quality, taking RoEs from 9.7% in FY2010 to 15.8% 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 44.2% during 3QFY2011. In light of this

change in liability mix, even in a rising interest rate scenario, we expect the bank’s

NIMs to improve to 2.6–2.8% over FY2011–12 (2.4% in FY2010). Apart from the

paradigm shift in the deposit mix reflected in its 44.2% CASA ratio, the bank has

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

international subsidiaries as well.

Worst of asset quality issues over

The bank’s asset quality continues to show further improvement, with declining

trend in additions to gross as well as net NPAs. Also, the bank has already reached

the mandated 70% provision coverage ratio. The bank’s restructured loans

continued their sharp fall, declining by 52.0% yoy to `2,562cr from `5,338cr in

3QFY2010. Cumulative restructuring of loans for the bank is also on the lower

side at 1.2% of total loans and 4.6% of net worth. We have factored in NPA

provisions to decline by 47.1% in FY2011 and 16.4% in FY2012.

We expect the reduction in risk profile of advances (and the consequent lower yield

on advances) to result in a ~80bp decline in NPA provisioning costs by 2012E,

eventually reflecting in improved RoA from 1.0% to 1.5% over FY2010–12E,

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 the bank is decisively

executing a strategy of consolidation, which 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 18 months have yielded a substantial

improvement in the ratio of branches to net worth; this 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, which we believe will drive 34%

yoy growth in net profit for FY2012 and enable RoE of 15.8% by FY2012E (with

further upside from financial leverage).

At the CMP, the bank’s core banking business (after adjusting `204/share towards

value of the subsidiaries) is trading at 2.4x FY2012E ABV of `369.3 (including

subsidiaries, the stock is trading at 2.2x FY2012E ABV of `504.1). We value the

bank’s subsidiaries at `204/share and the core bank at `1,108/share (3.0x

FY2012E ABV). We maintain Buy on the stock with a Target Price of `1,312,

implying an upside of 21.1% from current levels.