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ICICI Bank
Lower credit costs provide the kicker
Event
ICICI Bank is the largest private sector bank in India. It provides the entire
gamut of financial products and services to large, mid and small corporate
and retail customers. ICICI Bank also has significant international lending both
through its UK and Canada subsidiaries and also its own international
branches.
Impact
Consolidation exercise now bearing fruit: We believe the consolidation
drive that the bank started about two years ago has resulted in significant
improvements in liabilities franchise and expense ratios and is on the right
track to improve its weak ROE.
Credit growth for FY11E maintained at 18%, chances of positive
surprises cannot be ruled out: Management continues to maintain its credit
growth target of 18% for FY11E. To achieve 20% YoY loan growth by end of
FY11E, the bank needs to achieve 5% QoQ loan growth in 4Q FY11
(compared to 6.4% QoQ loan growth delivered in 3Q11) which we believe is
easily achievable especially considering that 4Q is seasonally a good quarter.
So chances of positive surprises can’t be ruled out.
Sharply falling credit costs – the biggest driver of earnings: With retail
NPLs having largely stabilized and exposure to SME and freshly restructured
assets being low, we believe credit costs which were hovering around 2% for
ICICI Bank are likely to stabilize around 1% over the next few years. Credit
costs for ICICI have fallen from a peak of 2.5% in 1Q10 to 1% in 3Q FY11
which indeed is encouraging. Lower provisioning is likely to be the main driver
of earnings growth going ahead. They also hold excess standard asset
provisioning to the tune of Rs4bn.
NIMs maintained at 2.6% – near term pressures exist: While the bank has
been able to improve CASA rapidly, it has not translated into a commensurate
increase in NIMs. Despite the bank having increased domestic LDR by
700bps QoQ to 75% NIMs have remained flat on a QoQ basis at 2.6%. The
inability to improve NIMs has been attributed to investments in RIDF bonds
made to meet priority sector targets (where yields are low) and partly to
corporate loans not getting re-priced as they are based on annual resets.
Though CASA for ICICI is at 44%, as a percentage of overall domestic
funding including borrowings it is at 36%.
Action and recommendation
Our top pick in the sector: ICICI is likely to show significant improvements in
ROA and is also capitalised well to expand its balance sheet.
ICICI Bank Aide Memoire
1. What are the incremental spreads you are making on loans?
2. How has the cost of funds moved in the last six months?
3. Your deposits actually contracted in 3Q11 compared to robust loan growth. Was this by design? What is the loan to deposit
ratio in domestic business you would be comfortable with?
4. What is your outlook on the liquidity tightness? Do you think it will ease in the next 2-3 months? What deposit growth do
you see for the system at large?
5. How is CASA behaving in 4Q given the rise in term deposit rates? What in your view is the sustainable CASA for your
bank?
6. What is the loan growth you are expecting for 4Q11 and FY12?
7. What are the key drivers for loans? How broad based is the loan growth? Are you seeing long-term project financing
picking up? If so, in which those segments?
8. Are you looking to re-enter the unsecured lending business? If yes, what are the additional safeguards you have put in
place this time to avoid the bad experience of 2007-08?
9. What is your growth target in mortgages? Are you seeing competition easing in the mortgage market now that teaser rates
are out of the way and service quality a bigger factor?
10. ICICI Bank had some time back re-entered the auto loan market in a big way. Do you see growth from that segment to be
satisfactory? Are there any concerns on portfolio quality with increasing rates?
11. With regard to international business, what are the incremental spreads you are making there? What is the amount of
borrowings you need to refinance in next 12 months?
12. With regard to ICICI Pru Life, what is the growth and margin outlook for FY11 and FY12?
13. What are the steps you have taken to improve margins in the life insurance business? How soon do you expect the results
of these to show?
14. Are you looking to list the life insurance business in FY12?
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank
Lower credit costs provide the kicker
Event
ICICI Bank is the largest private sector bank in India. It provides the entire
gamut of financial products and services to large, mid and small corporate
and retail customers. ICICI Bank also has significant international lending both
through its UK and Canada subsidiaries and also its own international
branches.
Impact
Consolidation exercise now bearing fruit: We believe the consolidation
drive that the bank started about two years ago has resulted in significant
improvements in liabilities franchise and expense ratios and is on the right
track to improve its weak ROE.
Credit growth for FY11E maintained at 18%, chances of positive
surprises cannot be ruled out: Management continues to maintain its credit
growth target of 18% for FY11E. To achieve 20% YoY loan growth by end of
FY11E, the bank needs to achieve 5% QoQ loan growth in 4Q FY11
(compared to 6.4% QoQ loan growth delivered in 3Q11) which we believe is
easily achievable especially considering that 4Q is seasonally a good quarter.
So chances of positive surprises can’t be ruled out.
Sharply falling credit costs – the biggest driver of earnings: With retail
NPLs having largely stabilized and exposure to SME and freshly restructured
assets being low, we believe credit costs which were hovering around 2% for
ICICI Bank are likely to stabilize around 1% over the next few years. Credit
costs for ICICI have fallen from a peak of 2.5% in 1Q10 to 1% in 3Q FY11
which indeed is encouraging. Lower provisioning is likely to be the main driver
of earnings growth going ahead. They also hold excess standard asset
provisioning to the tune of Rs4bn.
NIMs maintained at 2.6% – near term pressures exist: While the bank has
been able to improve CASA rapidly, it has not translated into a commensurate
increase in NIMs. Despite the bank having increased domestic LDR by
700bps QoQ to 75% NIMs have remained flat on a QoQ basis at 2.6%. The
inability to improve NIMs has been attributed to investments in RIDF bonds
made to meet priority sector targets (where yields are low) and partly to
corporate loans not getting re-priced as they are based on annual resets.
Though CASA for ICICI is at 44%, as a percentage of overall domestic
funding including borrowings it is at 36%.
Action and recommendation
Our top pick in the sector: ICICI is likely to show significant improvements in
ROA and is also capitalised well to expand its balance sheet.
ICICI Bank Aide Memoire
1. What are the incremental spreads you are making on loans?
2. How has the cost of funds moved in the last six months?
3. Your deposits actually contracted in 3Q11 compared to robust loan growth. Was this by design? What is the loan to deposit
ratio in domestic business you would be comfortable with?
4. What is your outlook on the liquidity tightness? Do you think it will ease in the next 2-3 months? What deposit growth do
you see for the system at large?
5. How is CASA behaving in 4Q given the rise in term deposit rates? What in your view is the sustainable CASA for your
bank?
6. What is the loan growth you are expecting for 4Q11 and FY12?
7. What are the key drivers for loans? How broad based is the loan growth? Are you seeing long-term project financing
picking up? If so, in which those segments?
8. Are you looking to re-enter the unsecured lending business? If yes, what are the additional safeguards you have put in
place this time to avoid the bad experience of 2007-08?
9. What is your growth target in mortgages? Are you seeing competition easing in the mortgage market now that teaser rates
are out of the way and service quality a bigger factor?
10. ICICI Bank had some time back re-entered the auto loan market in a big way. Do you see growth from that segment to be
satisfactory? Are there any concerns on portfolio quality with increasing rates?
11. With regard to international business, what are the incremental spreads you are making there? What is the amount of
borrowings you need to refinance in next 12 months?
12. With regard to ICICI Pru Life, what is the growth and margin outlook for FY11 and FY12?
13. What are the steps you have taken to improve margins in the life insurance business? How soon do you expect the results
of these to show?
14. Are you looking to list the life insurance business in FY12?
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