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| The worst is over |
| Sarath Chelluri / Mumbai Feb 01, 2010, 02:15 IST |
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While ICICI Bank’s revamp strategy has started to pay-off, a reversal in the trend of declining income and profits could improve stock valuations
 India’s largest private bank, ICICI Bank published yet another decline in its quarterly profits. At 13.5 per cent, the profit decline for December 2009 quarter is its second largest drop in the last seven quarters. The fall in profits was consequent to lower loan activity and a decline in treasury income that was seen last year. A slowing economy (slower credit off-take) and an aim to keep a tab on non-performing assets resulted in the bank’s business volumes shrinking for the fifth time in as many quarters.
A muted Q3 results might not have rejoiced the Street, but there are positives in the form of a stabilising business environment. The bank’s 4C strategy namely, cost control, enhance CASA ratio, control credit quality and capital conservation has started to pay-off. While operating costs have been under control, the rising share of low-cost CASA deposits has helped sustain the improvement in margins. More importantly, if things go well, the bank is all set to reverse the trend of declining topline and bottomline in the next fiscal, which could lead to some re-rating of the stock as well.
Looking up?
Repayments by customers in the retail loan and overseas portfolios meant that the bank’s advances in the December 2009 quarter shrank further with outstanding loans lower by 6 per cent sequentially. Overall, advances have declined 8.8 per cent on an average in the last two years and hence, net interest income has grown at a modest 2.5 per cent, in this period. While the overall advances book contracted, the private sector lender preferred to enhance focus on secured loan products.
In deposits, too, the bank had a flat (in absolute numbers) quarter sequentially; in the last two years, deposits have fallen by 7.25 per cent on an average. ICICI had been trying to align its deposit base in line with its shrinking asset base. However, it has increased focus on lower cost deposits. As a result, CASA deposits have grown at 16 per cent on average in the last two years thereby improving its share in total deposits to around 39.6 per cent as of December 2009. Recently, the bank has also managed to retire some of its high-cost bulk deposits.
The management observed a pick-up in disbursals to home and car loan segments. While this trend is likely to sustain, growth could also be driven by higher disbursals to priority sector and to corporates, in the coming quarters. Overall, the management expects the loan growth to pick up in the coming quarters. For the March 2010 quarter, expect advances to improve 8-10 per cent sequentially, which incidentally would be the first sequential increase in the last four quarters.
 Not there yet
A rise in bond yields hit the banks’ treasury book. On this count, the bank reported a loss of Rs 26 crore in the December quarter as against an Rs 976 crore profit in the year ago quarter. Overall, non-interest income declined 33.5 per cent, affecting the overall profitability. If it was not for the control on operating costs as the result of bank’s strategy to move activities in-house, net profits would have been lower in the last few quarters. A control on costs meant that its cost-to-income ratio has improved to 36.5 per cent for the December 2009 quarter (see chart Key ratios). Overall, net profit fell 13 per cent year-on-year to Rs 1,101 crore in the quarter.
Higher provisioning for NPAs ensured that profitability was under pressure for the last five quarters. Positively, the bank has been able to improve margins despite it moving away from high-yielding unsecured assets. In the recent quarter, the increase in low-cost deposits and decline in cost of bulk deposits reduced the overall cost of funds by about 60 basis points and helped neutralise a decline of about 40-50 basis points observed in the yield on assets. Net interest margins, thus, improved to 2.6 per cent in the December quarter. Going ahead, expect the bank to maintain NIMs of 3 per cent in the domestic operations.
Asset quality
Considering ICICI Bank’s problem assets, its NPA provision charges have been higher vis-a-vis peers. ICICI Bank’s provision charges as a proportion of advances stood at 5.6 per cent, higher than HDFC Bank’s 3.7 per cent and Axis Bank’s 4.4 per cent. ICICI added another Rs 600 crore (this quarter) to its restructured assets, taking the total to Rs 5,338 crore, highest amongst bigger private players.
Including technical write-offs, the banks NPA coverage is around 62 per cent. Since this coverage needs to go up to 70 per cent by September 2010 in line with RBI’s mandate, the bank’s provision charges are expected to remain high over the next 2-3 quarters. On the asset quality front, although it lags its private peers, it appears that the bank has already seen its worst. From the highs in March 2009 quarter, gross NPAs slipped sequentially from thereon and at the end of December quarter stood to Rs 8,930 crore or about 7-8 per cent lower than in December 2008 quarter. But, since the advances have been shrinking, the NPA ratio is showing an uptrend, which should flatten once the advances start growing in 2010-11.
| BETTER PROFIT OUTLOOK |
| in Rs crore |
FY09 |
Q3 FY10 |
% chg * |
FY10E |
FY11E |
| Net int income |
8,367 |
2,058 |
3.4 |
8,272 |
9,103 |
| Other income |
7,604 |
1,673 |
-33.5 |
7,153 |
8,351 |
| Operating profit |
8,925 |
2,369 |
-14.5 |
9,627 |
9,797 |
| Net Profit |
3,758 |
1,101 |
-13.5 |
3,872 |
4,746 |
| P/E (x) |
24.6 |
- |
- |
23.9 |
19.5 |
| P/BV (x) |
1.9 |
- |
- |
1.8 |
1.7 |
| * % chg is year-on-year; E: Estimates |
Conclusion
Unlike in 2008 when ICICI Bank’s stock underperformed the markets, it has been an outperformer since March 2009. This was led by hopes that the bank could ignite its growth engine after cleaning up its books. With the trend in its bad assets stabilising, the expected pick in advances growth in 2010-11 should drive profitable business volumes.
Compared to a tepid 2009-10, the earnings in next fiscal year are expected to grow between 18-23 per cent. ICICI Bank is also expected to add around 500-600 branches in the next few quarters, which should help the bank maintain the share of CASA deposits in the range of 35-40 per cent and hence, its NIMs. At Rs 830.40, the stock trades at 1.7 times its estimated 2010-11 price-to-book. Given the improving prospects and the potential to unlock value from its subsidiaries and joint ventures (combined value pegged at Rs 250-300 per share of ICICI Bank), the stock could deliver healthy returns in the next one year.
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