ICICI Bank -Strong earnings but cost pressures visible: Emkay

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ICICI Bank

Strong earnings but cost pressures visible

HOLD

CMP: Rs1,084                                        Target Price: Rs 1,200

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n     ICICI Bank’s NII for Q3FY11 grew by 12.3% yoy Rs23.1bn driven by 6.4% qoq growth in advances and stable NIMs. Savings on provisions resulted in 30% yoy growth in profits

n     The cost of funds incrementally could have seen sharp rise as it rose by 12bps qoq despite lower deposits. The reset in floating rate investments helped sustain NIMs

n     The net addition to ICICI Bank’s NPAs was almost zero during the quarter. Total/retail net slippages at Rs2.6bn/1.7bn only due to BoR merger

n     Valuations at 2.2x FY11E/2.0x standalone FY12E ABV not unreasonable. Maintain HOLD rating with TP of Rs1200

Double digit yoy growth in NII after ten quarters

ICICI Bank’s NII for Q3FY11 grew by 12.3% yoy (4.9% qoq) driven by stable NIMs and

6.4% qoq growth in advances. Adjusted for BoR, the growth could have been 7.6% yoy.

Partially aided by investment yields and expanding CDR

Despite sharp rise in cost of funds, the NIMs were maintained at 2.6% driven by

improved yield on investments (as some floating rate investments got repriced upwards)

and also as the CDR expanded to ~95%, up almost 700bps qoq (including international

book). Even the domestic CDR would have expanded by ~600bps qoq.

Incr cost of funds moving up sharply; NIMs may come under pressure

Despite having redeemed its term deposits by ~2.8% sequentially, the cost of funds

for.Q3FY11 has still gone up by ~12bps indicating that the cost of incremental deposits is

sharply higher than the retiring deposits. The costs can move up even higher as the deposit

repricing usually happens over longer period of time. A 50bps increase in the lending rates

effective from this quarter would help mitigate the costs partially.

Advances grow 6.4% qoq on higher base

The advances have grown by 6.4% qoq to Rs2.1tn. The advances have infact grown on

higher base as Bank of Rajasthan advances (Rs65.3bn) were consolidated with ICICI Bank

in Q2FY11. The growth was driven by strong qoq jump in PSL loans (rural), SME and large

corporate business.

Retail book largely remains stable

The retail asset book grew by just 1.1% qoq as the bank continued to reduce exposure to

unsecured loans. Also, the disbursals to retail segment at Rs71bn in Q3FY11 were lower

than Rs78bn in Q2FY11.

Sheds term deposits; decline in current deposits due to ASBA

The CASA during the quarter has expanded by 22bps qoq to 44.2% despite healthy

balance sheet growth. As there were no big primary market issuances this quarter, the

current account deposits have declined 9.1% qoq due to drop in ASBA balances.

Strong corporate business continues to drive fees

The fee income grew by 14.3% yoy driven by the corporate business. The fee income as %

of assets continued to be strong at 1.7% vs 1.5% average for FY10.

Integration of BoR hurts core profitability

Since, Q3FY11 number had full impact of BoR merger, the operating profit growth was

lower than the revenue growth. During BOR expenses were to the tune of Rs900mn. In

FY09 and FY10, BOR’s cost/income ratios were at almost 87% and 105% respectively

Improvement in slippages continues

The moderation in slippages continued as ICICI Bank has virtually nil NPAs on incremental

basis, The provision cover stood at 71.8%.

Overseas subsidiaries remain stable

The performance of UK and Canada banking subsidiaries continued to remain stable as the

profitability continued to improve qoq.

During Q3FY11, the UK subsidiary’s contracted by 2.8% qoq; however the much of the

mobilisations were parked in cash and liquid securities. Canada subsidiary’s book

continued to shrink as the same was down 6.0% qoq.

Other subsidiaries’ performance robust

The performance of non-banking subsidiaries was robust during the quarter as the profits in

almost all businesses improved significantly.

Capital adequacy remains comfortable

The bank is comfortably placed with Capital adequacy at 20.0% and tier I at 13.76%.

Valuations and view

We maintain our estimates of 25% CAGR in earnings over FY10-12E for ICICI Bank with

core RoE of 12.5% (10% in FY10) as the credit costs come down. We have valued the

banking (including subsidiary) operations of ICICI Bank at 2x on FY12E P/ABV and

maintain HOLD rating with price target of Rs1200.