Recommendations » India
ICICI Bank 2QFY2012 performance highlights and results update
By Angel Broking
For 2QFY2012, ICICI Bank’s standalone net profit grew by reasonable 21.6% yoy to Rs.1,503cr, in-line with ours as well as street’s estimates. Sequentially stable NIM and asset quality were the key highlights of the results. Continued reduction in NPA provisioning burden drove net profit growth. We maintain our Buy recommendation on the stock.
Stable NIM and asset quality: During 2QFY2012, the bank’s business momentum picked up a bit as compared to the previous quarter, with advances growing by 6.0% qoq (up 20.5% yoy) and deposits increasing by 6.3% qoq (moderate 9.9% yoy growth). Saving account deposits growth was relatively better at 10.9% yoy. Period-end CASA ratio improved marginally to 42.1%. Reported NIM remained flat on a sequential as well as yoy basis at 2.6%, as higher yields were offset by higher funding costs. Domestic NIM compressed marginally by 10bp qoq to ~2.9%; however, international NIM improved by ~20bp qoq to 1.1%. Growth in fee income continued to be below expectations at 7.0% yoy. Employee expenses rose considerably by 35.0% yoy, primarily due to higher headcount. Provisioning expenses declined substantially by 50.3% yoy to Rs.319cr on the back of reduced share of unsecured credit portfolio of the bank. Asset quality remained largely stable with annualized slippage ratio remaining within manageable limits at ~1.4%, gross NPAs remaining flat sequentially and net NPAs declining by 5.2% qoq. Provision coverage ratio (as per the RBI’s guidelines) remained healthy at 78.2% in 2QFY2012 (76.9% in 1QFY2012).
Outlook and valuation: The bank’s substantial branch expansion in the past 24 months is expected to sustain a far more favorable deposit mix going forward. Moreover, a lower risk balance sheet has driven down NPA provisioning costs, which we believe will enable RoE of 15.4% by FY2013E (with further upside from financial leverage). At the CMP, the bank’s core banking business (after adjusting for subsidiaries) is trading at 1.8x FY2013E ABV (including subsidiaries, at 1.7x FY2013E ABV). We maintain Buy on the stock with a target price of Rs.1,114.
Business growth picks up; NIM sustained at 2.6%
During 2QFY2012, momentum in the bank’s advances picked up a bit. Advances increased by 6.0% qoq (20.5% yoy). Sequential growth was aided by strong 19.8% qoq growth in overseas advances (partly on the back of INR depreciation) and traction in corporate loans, which grew by 8.2% qoq (21.5% yoy). Excluding the impact of exchange rate movement, growth in international advances stood at ~26% yoy. Rural loans declined by 6.5% qoq due to the seasonal nature of such loans. Loans of the SME and retail segments were more or less flat sequentially. However, on a yoy basis, the SME segment registered healthy 41.6% growth.
Retail loans grew by muted 5.4% yoy, partly due to the bank’s conscious strategy to reduce the share of unsecured personal loans. Personal loans came off by a sharp 38.2% qoq and 60.5% yoy, while credit card debt declined by 18.3% yoy. Consequently, the retail segment’s contribution to the advances book came down to 35.0% as of 2QFY2012 from 40.0% as of 2QFY2011.
Deposits accretion also showed a bit of traction, registering growth of 6.2% qoq (a muted 9.9% yoy). CASA deposits growth was muted 5.1% yoy, which was dragged down by a 5.3% yoy decline in current account deposits. Saving account deposits growth was relatively better at 10.9% yoy. Though period-end CASA ratio improved marginally to 42.1%, average CASA ratio declined by ~200bp qoq to 38.3%.
Reported NIM remained flat both on a sequential and on a yoy basis at 2.6% as higher yields were offset by higher funding costs. Domestic NIM compressed marginally by 10bp qoq to ~2.9%; however, international NIM improved by ~20bp qoq to 1.1%, in-line with management’s guidance.
Going forward in FY2012, management expects global NIMs to sustain at 2.6% on the back of better CASA deposits accretion and improvement in overseas NIM from the present level of 1.1% to ~1.2% by the end of FY2012.
Fee income growth moderates further
During 2QFY2012, other income rose by 10.2% yoy on the back of lower treasury losses and 6.9% yoy growth in fee income. Excluding treasury loss, other income registered muted growth of 5.7% yoy. Fee income growth was affected due to slower corporate capex project announcements and a lower number of financial closures of projects. The bank is witnessing traction in fees from the more granular transaction banking, forex and derivatives segments and remittance fees.
Management expects corporate fees to gain momentum once the traction comes back in corporate loan sanctions and new projects. Going forward, the bank is targeting fee income growth in-line with advances growth on the back of growth in corporate fees and pick-up in retail fees.
Asset quality continues to improve
The bank’s asset quality continued to improve during 2QFY2012, with gross NPAs remaining flat sequentially and net NPAs declining by 5.2% qoq to Rs.2,184cr. On a yoy basis, net NPAs dipped sharply by 30.6%. Sequentially, gross NPA ratio improved to 4.1% from 4.4% as of 1QFY2012, while net NPA ratio declined to 0.9% from 1.0% as of 1QFY2012. Provision coverage ratio (as per the RBI’s guidelines) remained at healthy levels of 78.2% (76.9% in 1QFY2012).
Annualized gross slippages ratio for the quarter was at ~1.4%, largely in-line with management’s target of 1.2–1.3%. As guided in the 1QFY2012 results earnings call, the bank restructured advances of ~Rs.740cr, bulk of which were from the Micro Finance Institutions (MFI). Out of the bank’s total exposure to MFIs of ~Rs.1,000cr, bulk of it has been either restructured or has slipped into NPAs.
The bank’s restructured loans increased to Rs.2,501cr from Rs.1,966cr as of 1QFY2012. The bank carried out gross restructuring of ~Rs.740cr during the quarter. Bulk of the restructuring carried out during the quarter pertained to MFIs. Provisioning expenses for the quarter declined considerably by 50.6% yoy to Rs.319cr on the back of reduced share of unsecured loans in the retail loan book and excess standard assets provisioning pool (of ~Rs.1,500cr). The bank has sufficient buffer of standard assets provisions for the remainder of FY2012. Going forward, management expects the low provisioning expenses trend witnessed in 1HFY2012 to continue for the remaining FY2012.
Opex rises on higher employee costs
During 2QFY2012, operating expenses increased by 20.5% yoy on account of a sharp 35.0% rise in employee expenses. Employee expenses growth was higher primarily due to a ~24% increase in average number of employees from 48,360 as of 2QFY2011 to ~60,000 during 2QFY2012 and an average 11-12% wage inflation. The cost-to-income ratio remained flat sequentially at 44.6% (rose by ~300bp on a yoy basis) on the back of a relatively slower operating income growth. Operating expenses to average assets were sequentially stable at 1.8%. After a substantial rise in employee headcount over the past one year, the bank is not planning considerable employee additions over the next 3-4 quarters. Management is targeting to maintain the cost-to-income ratio close to 2QFY2012 levels of 44-45% for FY2012. Over a medium term, management expects the cost-to-income ratio to settle at 41-42% and the operating cost-to-average assets to stand at 1.7-1.8%.
Strong capital adequacy
Driven by its large net worth, capital adequacy continued to be strong at 19.0%, comprising substantial (68%) tier-1 component of 13.1%.
Under-leveraged branch network
With the merger of Bank of Rajasthan, the bank enjoys a strong pan-India network of 2,535 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 ~Rs.41cr compared to Rs.65cr as of3QFY2008 and total assets/branch of Rs.174cr compared to Rs.394cr as of 3QFY2008.
The bank currently has 300-350 branch licenses, which it plans to utilize fully in 2HFY2012, to increase its branch network to 2,850-2,900 branches by the end of FY2012. Further, management is planning to take its branch network to ~4,000 branches over the next four years (FY2015) in a back-ended mode. Going forward, we expect the bank to leverage this network to grow its CASA market share.
Overview of performance of subsidiaries
- For 2QFY2012, consolidated net profit rose by healthy 43% yoy to Rs.1,992cr.
- ICICI Prudential Life's overall market share for the period April to August 2011 was 5.7% and private market share was 14.9% based on new business retail weighted received premiums. ICICI Life's overall market share improved from 5.1% in 1QFY2012 to 6.4% for the period July to August 2011.
- ICICI Lombard General Insurance maintained its leadership position in the private sector with an overall market share of 9.6% up to August 2011.
- The overseas banking subsidiaries of the bank (viz. ICICI Bank Canada and ICICI Bank UK) continue to remain a drag on the overall consolidated profitability. Loan book of both these subsidiaries continued to contract as local regulatory provisions have turned against the bank’s envisaged strategy. Both these subsidiaries continue to be over-capitalized with CAR exceeding by 29% in each of them.
- The bank has initiated dialogue with the Canadian regulator to see if part of the capital can be repatriated. However, in the short term, the bank expects the over-capitalized subsidiaries to remain a drag on RoEs.
- The exposure to Europe stands at a relatively lower US$35mn due to a UK-based institution. The bank also has an exposure of ~US$300mn (brought down from US$600mn recently) in the form of investments, which is quite diversified in management’s view and larger exposures are to banks in Asia Pacific and other domains.
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 2,535 branches by 2QFY2012 and strong capital adequacy, even without reckoning 1HFY2012 profits, at 19.0% (Tier-I at 13.1%) have positioned it to gain CASA and credit market share, respectively. In fact, the bank has begun gaining market share in savings accounts since FY2010. During FY2011, the bank improved its market share of savings deposits by 10bp over FY2010, capturing a substantial 5.8% incremental market share.
Improved deposit mix to lead to better NIM
The bank’s strategic transformation is expected to drive significantly better balance sheet and earnings quality, taking RoEs from 9.7% in FY2010 to 15.4% in FY2013E. 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). CASA ratio has remained healthy at 42.1% even in 2QFY2012. In light of this change in liability mix, even in a rising interest rate scenario, we expect the bank’s NIM to remain largely stable in FY2012 and improve to ~2.6% by FY2013 on the back of improvement in international NIM from ~1.1% as of 2QFY2012 to ~1.2% over the next 2-3 quarters. Apart from the paradigm shift in the deposit mix reflected in its 42.1% 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.
Asset quality trends remain healthy
The bank’s asset quality continues to show further improvement, with a declining trend in additions to gross as well as net NPAs. Even in 2QFY2012, annualized gross slippages ratio was comfortable at ~1.4% (same as that witnessed in 1QFY2012). Also, the bank has maintained a comfortable provision coverage ratio of 78.1%. The bank’s restructured loans witnessed a bit of increase during 2QFY2012, but they were primarily on account of loans to the MFIs. We have factored in NPA provisions to decline by 27.6% in FY2012 over FY2011 levels and stabilize around these lower levels in FY2013.
We expect the reduction in risk profile of advances (and the consequent lower yield on advances) to result in a ~30bp decline in NPA provisioning costs by 2013E over FY2011, eventually reflecting in improved RoA from 1.0% to 1.4% over FY2010–13E, commensurate with the improvement in CASA ratio.
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 substantial branch expansion in the past 24 months is expected to sustain a far more favorable deposit mix going forward. Moreover, a lower risk balance sheet has driven down NPA provisioning costs, which we believe will drive 20.7% yoy growth in net profit for FY2012 and enable RoE of 15.4% by FY2013E (with further upside from financial leverage).
We have tweaked our estimates to factor in slower business growth considering the slowdown in domestic economic environment and a consequent lower growth in fee income. We have largely maintained our estimates for FY2012 as well as FY2013 and expect the bank to record a healthy 23.3% earning CAGR over FY2011-13E.
At the CMP, the bank’s core banking business (after adjusting Rs.160/share towards value of the subsidiaries) is trading at 1.8x FY2013E ABV (including subsidiaries, the stock is trading at 1.7x FY2013E ABV). We value the bank’s subsidiaries at Rs.160/share and the core bank at Rs.954/share (2.2x FY2012E ABV).
We maintain our Buy rating on the stock with a target price of Rs.1,114, implying an upside of 19.7% from current levels.
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