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ICICI Bank – Challenges ahead
ICICI Bank reported largely in-line earnings for 3QFY11. ROA improved to 1.5%, partly on the
back of lower provisions for bad loans. Going into FY12, improving asset quality, and hence lower
provisions, should be reflected in a higher bottom line. However, it may be difficult to boost NIM in
the current macro environment.
3QFY11: ROA improves significantly, largely driven by lower provisions
Net interest income (NII) growth of 12.3% yoy (+5% qoq) was largely in line with the 15% yoy
loan growth (+6.4% qoq), as net interest margins (NIMs) remained flattish at about 2.6%. Core
fee income was up about 14% yoy in 3Q (+12% yoy in 9MFY11). Operating expenses continued
to increase steadily qoq (+26% yoy in 3Q; +10% yoy in 9MFY11). Operating profit was thereby
largely flat yoy in 3QFY11 (down 8% yoy in 9MFY11, partly due to one-time treasury gains in
FY10). However, loan loss provision charges came down about 35bp yoy (10bp qoq) in 3QFY11.
On balance, the bank reported ROA of 1.5% in 3QFY11 (1.3% in 3QFY10 and 1.3% in 2QFY11).
Asset quality appears to be stabilising
The absolute amount of gross NPL has remained largely stable over the last six months.
Consequently, loan loss provision charges are steadily trending downward, from 180bp of loans
in 9MFY10 to 100bp in 9MFY11. We factor in 15-20bp yoy lower credit costs at about 1.0% in
FY12-13F. Total net restructured loans appear comfortable at 1.2% of the loan book as of
December 2010.
Improved liability mix has aided NIM; challenge is to improve NIM further
ICICI Bank has improved its liability mix over the past few years. The proportion of low-cost
deposits (CASA, current and savings accounts) in 3QFY11 was about 44% (39.6% a year ago).
However, at end-December 2010, ICICI Bank had about Rs122bn invested in subsidiaries and
Rs144bn in Nabard’s Rural Infrastructure Development Fund (or RIDF) to meet a shortfall in
priority-sector lending. A combination of these two factors should keep a lid on NIM.
No material change in estimates; maintain Hold and target price of Rs1154
We have made no material changes to our earnings estimates and hence our target price. Going
into FY12, the benefits of largely stable NIM and lower credit-costs should be partially offset by
the higher tax rate. In short, we expect ROA will rise to about 1.5% in FY12.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank – Challenges ahead
ICICI Bank reported largely in-line earnings for 3QFY11. ROA improved to 1.5%, partly on the
back of lower provisions for bad loans. Going into FY12, improving asset quality, and hence lower
provisions, should be reflected in a higher bottom line. However, it may be difficult to boost NIM in
the current macro environment.
3QFY11: ROA improves significantly, largely driven by lower provisions
Net interest income (NII) growth of 12.3% yoy (+5% qoq) was largely in line with the 15% yoy
loan growth (+6.4% qoq), as net interest margins (NIMs) remained flattish at about 2.6%. Core
fee income was up about 14% yoy in 3Q (+12% yoy in 9MFY11). Operating expenses continued
to increase steadily qoq (+26% yoy in 3Q; +10% yoy in 9MFY11). Operating profit was thereby
largely flat yoy in 3QFY11 (down 8% yoy in 9MFY11, partly due to one-time treasury gains in
FY10). However, loan loss provision charges came down about 35bp yoy (10bp qoq) in 3QFY11.
On balance, the bank reported ROA of 1.5% in 3QFY11 (1.3% in 3QFY10 and 1.3% in 2QFY11).
Asset quality appears to be stabilising
The absolute amount of gross NPL has remained largely stable over the last six months.
Consequently, loan loss provision charges are steadily trending downward, from 180bp of loans
in 9MFY10 to 100bp in 9MFY11. We factor in 15-20bp yoy lower credit costs at about 1.0% in
FY12-13F. Total net restructured loans appear comfortable at 1.2% of the loan book as of
December 2010.
Improved liability mix has aided NIM; challenge is to improve NIM further
ICICI Bank has improved its liability mix over the past few years. The proportion of low-cost
deposits (CASA, current and savings accounts) in 3QFY11 was about 44% (39.6% a year ago).
However, at end-December 2010, ICICI Bank had about Rs122bn invested in subsidiaries and
Rs144bn in Nabard’s Rural Infrastructure Development Fund (or RIDF) to meet a shortfall in
priority-sector lending. A combination of these two factors should keep a lid on NIM.
No material change in estimates; maintain Hold and target price of Rs1154
We have made no material changes to our earnings estimates and hence our target price. Going
into FY12, the benefits of largely stable NIM and lower credit-costs should be partially offset by
the higher tax rate. In short, we expect ROA will rise to about 1.5% in FY12.
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