Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank reported PAT of INR 14.4 bn (up 30% Y-o-Y) in Q3FY11, ahead of our
estimate of INR 13.9 bn, aided by lower credit cost and pick up in loan growth
momentum. Key highlights of the quarter were:
(1) Double digit Y-o-Y growth in loan book (ex BoR) after 10 consecutive quarters of
decline; on course to achieve the revised target of 18-20% by FY11-12; (2) muted
deposit growth at 10% (down 2% Q-o-Q) due to lower term deposit accretion (down
3% Y-o-Y) and decline in capital market float; savings deposit, however, grew 2% Q-o-
Q, sustaining CASA at 44.2%; Domestic CD ratio expanded to 68% (from 75% in Q2
FY11); (3) credit cost declined to 1% due to continued slower NPL formation and
provisioning coverage reaching the targeted 70%; excess standard asset provisioning
utilised for special home loan schemes (no hit on P&L); (4) opex jumped 9% Q-o-Q, led
by 22% hike in staff expenses (due salary increments and bonus provisions), new
branch addition and full impact of e-BOR merger; (5) fee income growth (14%) tracked
asset growth, driven by corporate and international businesses; (6) tax rate since two
quarters has been lower at 21-23% as tax benefit of 3.5% is estimated to flow from
BOR merger.
Loan growth gaining traction
Signaling an end to the consolidation phase with credit quality, liability franchise
and cost structure falling in place, ICICI Bank has now switched to the next growth
phase by effectively leveraging its balance sheet. Loan book (ex BoR) grew in
double digits Y-o-Y after 10 consecutive quarters of decline. This was led by 10%
Q-o-Q growth in international loan book (rupee depreciation supporting to an
extent) and similar growth in corporate book. Though retail disbursement came off
10% Q-o-Q to INR 71 bn, it matched retail repayment, leading to modest pick-up
of 1.2% Q-o-Q in the retail book. Management maintained its guidance of growing
loan book by 18-20% in FY11-12.
Outlook and valuations: Re-rating in progress; maintain ‘BUY’
With the final ‘C’ of the 4C strategy, credit quality, falling in place, we believe
ICICI Bank is all set to switch from consolidation to the growth phase (FY11 loan
book growth targets maintained at 18-20%) with a leaner and more robust
business model (40% CASA is here to stay). The management indicated that
margins may be under pressure, going forward, due to rise in deposit rates.
However, we believe decline in credit costs will more than offset pressure on
margins. Core RoA will improve meaningfully to 1.6% by FY12E. We value the
core book at 2.3x in the interim, with potential for further re-rating as return
ratios improve. Valuing subsidiaries at INR 183, we arrive at a revised target
price of INR 1,297. We maintain ‘BUY/ Sector Outperformer’
recommendation/rating on the stock.
Credit costs slide to 1%
Slower NPL formation, coupled with achievement of the 70% target, led to decline in
credit cost to ~1% (from 1.4% in Q2FY11 and 2.0% in FY10). The bank carried an
excess standard asset provisioning (of ~INR 5 bn), which was partially utilised to meet
RBI mandate of 2% provisioning on special home loan schemes (outstanding portfolio of
which stands at INR 50 bn).
Positive trend continued in asset quality with gross NPLs declining to 4.75% from 5.03%
in Q2FY11 - mere INR 400 mn net addition to GNPLs in Q3FY11. The bank indicated that
there was no significant write-off during the quarter. NNPL dipped 9% due to higher
provisioning, thereby improving provisioning coverage by 280bps Q-o-Q, to 71.8%. We
believe with further run down of the unsecured portfolio, slippage levels will trend down
to low 1.2% (annualised from current level of 1.8%) sooner than expected, a big positive.
Restructured book was sustained at INR 25.6 bn (1.3% of loan book) as addition of INR
6 bn to restructured pool was offset by similar level of upgrades. The bank has trimmed
its MFI exposure from INR 24 bn in Q2FY11 to INR 18 bn in Q3FY11, of which, ~INR 13
bn is by way of term loans.
Margin sustained at 2.6%; to be under pressure going forward
Sequentially, margin was sustained at 2.6%; NIM in the domestic operations was
maintained at 3% and in international business, it inched up marginally to 0.85%. ICICI
Bank hiked its PLR by 50bps in August and base rate by 25bps in October, which we
believe led to 10bps improvement in yield on advances (full impact of repricing not yet
felt due to a lag). This was further supported by 20bps Q-o-Q increase in investment
yields. The management, however, indicated that 150bps hike in deposit rates (in 1-2
year bucket) in December and January will exert some pressure on funding costs and it
may not be possible to pass it on by way of corresponding increase in lending rates.
However, higher level of CASA, coupled with higher marginal international spreads, will
provide some support.
CASA sustained at 44%; likely to be maintained near 40%
Improving the bank’s liability profile is at the cornerstone of management’s consolidation
strategy. Management’s focus on improving the share of low-cost deposits is delivering
commendable results. Savings deposit grew 2% Q-o-Q (27% Y-o-Y), sustaining CASA at
44.2% despite decline in capital market float (reflected in lower current deposit). Term
deposit accretion was also muted (down 3% Y-o-Y). Saving balance flows can be
sustained on a normal rate of INR 10 bn per month, given new branches coming on
board. Management stated that given the expanding reach (plan to reach 4,000
branches in the next three years) and its strategy to enhance retail share, average CASA
could sustain at 40%.
Opex inches up; BOR plus salary increments impact
Opex jumped 9% Q-o-Q, led by 22% hike in staff expenses (due to salary increments and
bonus provisions), new branch addition and full impact of e-BOR merger. In Q2FY11, only
49 days impact of salaries of e-BOR employees was reflected, while in Q3FY11 employee
cost of e-BOR was to the tune of INR 1 bn. One of the most significant achievements of
the bank over the past two years has been its tight control on operating expenses,
making the business model fitter and leaner. Efficiency ratios and cost-to-average assets
have improved from 2.4% in FY07 to 1.7% in FY10 despite decline in assets. This
demonstrates significant reduction in cost undertaken by the bank.
Fee income tracking loan growth
ICICI Bank’s core fee income grew 14% Y-o-Y, to INR 16.3 bn, on the back of pick up in
fees in corporate and international segments. We expect fee income to further gather
traction in FY11 with return of growth in advances. The bank’s recently opened branches
will also add to fee income growth. Channel expansion and higher productivity will offset
headwinds to fee income growth from regulatory changes, capping fees for mutual fund
and insurance distribution. It booked investment profits of INR 210 mn (against hit of
INR 1.44 bn in Q2FY11 and INR 260 mn in Q3FY10).
RoAs to touch 1.6% by FY12E; RoE progression slow
On the back of improving core performance and lower credit cost, we expect meaningful
improvement in ICICI Bank’s RoAs to ~1.6% by FY12-13E from 1.2% currently. Core
RoE could improve from the current level of 10% to 15% by FY12E.
ICICI Prudential: IRDA guidelines impact margins and volumes
• In Q3FY11, life insurance business reported PAT of INR 6.14 bn. Of this, INR 4.89 bn
was on account of transfer of surplus in the non-participating policyholders’ fund for
past three quarters, accounted for in the current quarter.
• IRDA’s new product guidelines (applicable September 2010 onwards) adversely
impacted the new business; new business volumes on annualised premium
equivalent (APE) basis declined 57.5% Q-o-Q, 61.8% Y-o-Y to INR 5.71 bn; renewal
premium remained flat Y-o-Y, but grew 5.5% Q-o-Q to INR 23.89 bn.
• AUM grew 1.3% Q-o-Q, 23.7% Y-o-Y to INR 663.34 bn.
• NBAP margin contracted 120bps Q-o-Q to 17.7%; on account of lower new business
volumes and NBAP margin compression, new business profit contracted 61% Q-o-Q,
65% Y-o-Y to INR 1 bn.
• We value ICICI Prudential at INR 203 bn for FY12E, implying P/EV of 1.9x
contributing INR 135 to per share value of ICICI Bank.
Company Description
Incorporated in 1994, ICICI Bank is India’s second largest bank and the largest among
private banks with total assets of about INR 3.6 tn as of March 2010. The bank has a
network of over 2000 branches and over 5500 ATMs. The bank’s focus is on retail
lending with retail financing representing 40% of total loans and advances while
International and corporate are the new growth drivers. The bank holds near market
leadership in almost all its businesses including mortgages, auto loans, commercial
vehicle loans, life insurance, general insurance, and asset management. Its subsidiaries
ICICI venture funds, Pru ICICI AMC, ICICI securities, ICICI prudential, and ICICI
Lombard are amongst the leading companies in their respective fields.
Investment Theme
The bank was prudent in raising capital ahead of time, which has been a big support to
capital adequacy ratios given the turmoil in global economic environment. FY10 will be a
year of consolidation for the bank, which, in our view, will give the bank an opportunity
to enhance its liability franchise and improve its asset quality.
Key Risks
Main risks for ICICI is NPA risk due to its low cumulative provisions. With ~40% of retail
asset book, it is vulnerable to system-wide deterioration in the quality of retail assets.
Moreover, share of non-collateralized assets in retail assets bring in more risk to the
bank’s balance sheet. Sharp increase in interest rates can affect the margins, as its
deposit mix has higher share of bulk deposits.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank reported PAT of INR 14.4 bn (up 30% Y-o-Y) in Q3FY11, ahead of our
estimate of INR 13.9 bn, aided by lower credit cost and pick up in loan growth
momentum. Key highlights of the quarter were:
(1) Double digit Y-o-Y growth in loan book (ex BoR) after 10 consecutive quarters of
decline; on course to achieve the revised target of 18-20% by FY11-12; (2) muted
deposit growth at 10% (down 2% Q-o-Q) due to lower term deposit accretion (down
3% Y-o-Y) and decline in capital market float; savings deposit, however, grew 2% Q-o-
Q, sustaining CASA at 44.2%; Domestic CD ratio expanded to 68% (from 75% in Q2
FY11); (3) credit cost declined to 1% due to continued slower NPL formation and
provisioning coverage reaching the targeted 70%; excess standard asset provisioning
utilised for special home loan schemes (no hit on P&L); (4) opex jumped 9% Q-o-Q, led
by 22% hike in staff expenses (due salary increments and bonus provisions), new
branch addition and full impact of e-BOR merger; (5) fee income growth (14%) tracked
asset growth, driven by corporate and international businesses; (6) tax rate since two
quarters has been lower at 21-23% as tax benefit of 3.5% is estimated to flow from
BOR merger.
Loan growth gaining traction
Signaling an end to the consolidation phase with credit quality, liability franchise
and cost structure falling in place, ICICI Bank has now switched to the next growth
phase by effectively leveraging its balance sheet. Loan book (ex BoR) grew in
double digits Y-o-Y after 10 consecutive quarters of decline. This was led by 10%
Q-o-Q growth in international loan book (rupee depreciation supporting to an
extent) and similar growth in corporate book. Though retail disbursement came off
10% Q-o-Q to INR 71 bn, it matched retail repayment, leading to modest pick-up
of 1.2% Q-o-Q in the retail book. Management maintained its guidance of growing
loan book by 18-20% in FY11-12.
Outlook and valuations: Re-rating in progress; maintain ‘BUY’
With the final ‘C’ of the 4C strategy, credit quality, falling in place, we believe
ICICI Bank is all set to switch from consolidation to the growth phase (FY11 loan
book growth targets maintained at 18-20%) with a leaner and more robust
business model (40% CASA is here to stay). The management indicated that
margins may be under pressure, going forward, due to rise in deposit rates.
However, we believe decline in credit costs will more than offset pressure on
margins. Core RoA will improve meaningfully to 1.6% by FY12E. We value the
core book at 2.3x in the interim, with potential for further re-rating as return
ratios improve. Valuing subsidiaries at INR 183, we arrive at a revised target
price of INR 1,297. We maintain ‘BUY/ Sector Outperformer’
recommendation/rating on the stock.
Credit costs slide to 1%
Slower NPL formation, coupled with achievement of the 70% target, led to decline in
credit cost to ~1% (from 1.4% in Q2FY11 and 2.0% in FY10). The bank carried an
excess standard asset provisioning (of ~INR 5 bn), which was partially utilised to meet
RBI mandate of 2% provisioning on special home loan schemes (outstanding portfolio of
which stands at INR 50 bn).
Positive trend continued in asset quality with gross NPLs declining to 4.75% from 5.03%
in Q2FY11 - mere INR 400 mn net addition to GNPLs in Q3FY11. The bank indicated that
there was no significant write-off during the quarter. NNPL dipped 9% due to higher
provisioning, thereby improving provisioning coverage by 280bps Q-o-Q, to 71.8%. We
believe with further run down of the unsecured portfolio, slippage levels will trend down
to low 1.2% (annualised from current level of 1.8%) sooner than expected, a big positive.
Restructured book was sustained at INR 25.6 bn (1.3% of loan book) as addition of INR
6 bn to restructured pool was offset by similar level of upgrades. The bank has trimmed
its MFI exposure from INR 24 bn in Q2FY11 to INR 18 bn in Q3FY11, of which, ~INR 13
bn is by way of term loans.
Margin sustained at 2.6%; to be under pressure going forward
Sequentially, margin was sustained at 2.6%; NIM in the domestic operations was
maintained at 3% and in international business, it inched up marginally to 0.85%. ICICI
Bank hiked its PLR by 50bps in August and base rate by 25bps in October, which we
believe led to 10bps improvement in yield on advances (full impact of repricing not yet
felt due to a lag). This was further supported by 20bps Q-o-Q increase in investment
yields. The management, however, indicated that 150bps hike in deposit rates (in 1-2
year bucket) in December and January will exert some pressure on funding costs and it
may not be possible to pass it on by way of corresponding increase in lending rates.
However, higher level of CASA, coupled with higher marginal international spreads, will
provide some support.
CASA sustained at 44%; likely to be maintained near 40%
Improving the bank’s liability profile is at the cornerstone of management’s consolidation
strategy. Management’s focus on improving the share of low-cost deposits is delivering
commendable results. Savings deposit grew 2% Q-o-Q (27% Y-o-Y), sustaining CASA at
44.2% despite decline in capital market float (reflected in lower current deposit). Term
deposit accretion was also muted (down 3% Y-o-Y). Saving balance flows can be
sustained on a normal rate of INR 10 bn per month, given new branches coming on
board. Management stated that given the expanding reach (plan to reach 4,000
branches in the next three years) and its strategy to enhance retail share, average CASA
could sustain at 40%.
Opex inches up; BOR plus salary increments impact
Opex jumped 9% Q-o-Q, led by 22% hike in staff expenses (due to salary increments and
bonus provisions), new branch addition and full impact of e-BOR merger. In Q2FY11, only
49 days impact of salaries of e-BOR employees was reflected, while in Q3FY11 employee
cost of e-BOR was to the tune of INR 1 bn. One of the most significant achievements of
the bank over the past two years has been its tight control on operating expenses,
making the business model fitter and leaner. Efficiency ratios and cost-to-average assets
have improved from 2.4% in FY07 to 1.7% in FY10 despite decline in assets. This
demonstrates significant reduction in cost undertaken by the bank.
Fee income tracking loan growth
ICICI Bank’s core fee income grew 14% Y-o-Y, to INR 16.3 bn, on the back of pick up in
fees in corporate and international segments. We expect fee income to further gather
traction in FY11 with return of growth in advances. The bank’s recently opened branches
will also add to fee income growth. Channel expansion and higher productivity will offset
headwinds to fee income growth from regulatory changes, capping fees for mutual fund
and insurance distribution. It booked investment profits of INR 210 mn (against hit of
INR 1.44 bn in Q2FY11 and INR 260 mn in Q3FY10).
RoAs to touch 1.6% by FY12E; RoE progression slow
On the back of improving core performance and lower credit cost, we expect meaningful
improvement in ICICI Bank’s RoAs to ~1.6% by FY12-13E from 1.2% currently. Core
RoE could improve from the current level of 10% to 15% by FY12E.
ICICI Prudential: IRDA guidelines impact margins and volumes
• In Q3FY11, life insurance business reported PAT of INR 6.14 bn. Of this, INR 4.89 bn
was on account of transfer of surplus in the non-participating policyholders’ fund for
past three quarters, accounted for in the current quarter.
• IRDA’s new product guidelines (applicable September 2010 onwards) adversely
impacted the new business; new business volumes on annualised premium
equivalent (APE) basis declined 57.5% Q-o-Q, 61.8% Y-o-Y to INR 5.71 bn; renewal
premium remained flat Y-o-Y, but grew 5.5% Q-o-Q to INR 23.89 bn.
• AUM grew 1.3% Q-o-Q, 23.7% Y-o-Y to INR 663.34 bn.
• NBAP margin contracted 120bps Q-o-Q to 17.7%; on account of lower new business
volumes and NBAP margin compression, new business profit contracted 61% Q-o-Q,
65% Y-o-Y to INR 1 bn.
• We value ICICI Prudential at INR 203 bn for FY12E, implying P/EV of 1.9x
contributing INR 135 to per share value of ICICI Bank.
Company Description
Incorporated in 1994, ICICI Bank is India’s second largest bank and the largest among
private banks with total assets of about INR 3.6 tn as of March 2010. The bank has a
network of over 2000 branches and over 5500 ATMs. The bank’s focus is on retail
lending with retail financing representing 40% of total loans and advances while
International and corporate are the new growth drivers. The bank holds near market
leadership in almost all its businesses including mortgages, auto loans, commercial
vehicle loans, life insurance, general insurance, and asset management. Its subsidiaries
ICICI venture funds, Pru ICICI AMC, ICICI securities, ICICI prudential, and ICICI
Lombard are amongst the leading companies in their respective fields.
Investment Theme
The bank was prudent in raising capital ahead of time, which has been a big support to
capital adequacy ratios given the turmoil in global economic environment. FY10 will be a
year of consolidation for the bank, which, in our view, will give the bank an opportunity
to enhance its liability franchise and improve its asset quality.
Key Risks
Main risks for ICICI is NPA risk due to its low cumulative provisions. With ~40% of retail
asset book, it is vulnerable to system-wide deterioration in the quality of retail assets.
Moreover, share of non-collateralized assets in retail assets bring in more risk to the
bank’s balance sheet. Sharp increase in interest rates can affect the margins, as its
deposit mix has higher share of bulk deposits.
No comments:
Post a Comment