ICICI Bank : BUY

Waning Provision Expenses & Robust NII Spur PAT

ICICI Bank’s PAT grew 44% YoY, in-line with our estimates, mainly due to a decline in provision expenses (down 61% YoY) and robust net interest income growth (23% YoY). Decline in provision expenses was mainly due to improved asset quality (gross NPA declined 1.5% QoQ). Advances growth maintained its momentum (up 5% QoQ) and supported margins at 2.7% (improved 10 bps QoQ). However, improvement in NIMs is mainly due to premature withdrawal of deposits; adjusting for this, NIM would have declined by ~6 bps QoQ. Deposits grew 4% QoQ while CASA ratio improved 90 bps QoQ to 45.1%. The bank continued to re-deploy funds from lower yielding investment book towards incremental advances, which will support NIMs in ensuing quarters. Other income declined by 13% YoY; however, fee income rose 18% YoY in-line with credit growth.

Zero net addition to NPAs:  Asset quality improved as gross NPAs shrunk by 1.5% QoQ to Rs 100 bn. Moreover, ICICI has shored up its provision coverage ratio to 76% (vs. 71.8% in Dec-

10) much above the regulatory requirement. Higher coverage will provide cushion to the bank’s profit in difficult times (maintains ~Rs 4 bn of excess provisions). Going forward, we expect that the credit cost will remain low & will support profitability.

Other highlights

• Growth gaining momentum:  ICICI’s balance sheet grew by 12% YoY (highest since 4QFY08) by focusing on lower risk but profitable business opportunities. The bank has envisaged fresh policy focusing towards improving corporate share in total credit at the start of FY11 and has successfully achieved it. SME and rural portfolio grew by 20% QoQ and 37% QoQ respectively which aided total advances growth at 5% QoQ. Unsecured retail book continue to contract; however, high growth in auto loan segment supported 6% QoQ growth in retail credit. Going forward, we expect a business growth of ~19% YoY for FY12E (management guidance – 20%) with significant contribution coming from corporate and mid corporate segments.
• CASA share improves: CASA ratio inched up to 45.1% (44.2% in Dec-10), despite higher term deposits rate during the quarter. Sequentially, current account deposits grew 10% while saving deposits grew 4% QoQ. Despite improving CASA ICICI Bank share, cost of deposits increased by 30 bps QoQ, which is mainly due to increase in term deposits rate.
• Re-pricing benefit to cushion NIM: In FY12E, ~75% of term deposits will be repriced likely at a higher rate against ~70% of total advances. This, coupled with falling share of international business, would likely to support margins in FY12E at current levels of ~2.6%.  Moreover, in 1HFY12, we expect NIMs to  contract marginally due to high disbursement towards agriculture sector in 4QFY11 (to meet priority sector lending norms). 
• Healthy fee income growth, treasury losses drag other income:  Other income declined by 13% YoY and 6% QoQ mainly due to treasury loss of Rs 1.9 bn. ICICI has booked ~Rs 1 bn of MTM losses in security receipts during the quarter. The bank  has  also  booked  some  MTM  losses  on  its  equity  and  G-Sec  portfolios  during the quarter (of ~Rs 0.9 bn). However, fees income growth at 18% YoY was in-line with the credit growth, mainly supported by revenues from corporate and SME advances. Going forward, we expect fees income growth to remain in-line with the credit growth.
• Higher staff expenses: Staff expenses grew by 47% YoY to Rs 8.5 bn mainly due to the bonuses paid and consideration of entire employee expenses of erstwhile BoR. This, along with decline in other income, led to an increase in cost to income ratio (up 216 bps QoQ) to 44.5% 
• Healthy CAR: The bank maintains a total CAR at 19.5% and Tier-I ratio at 13.1%. We expect return ratios to improve further, driven  by  robust  profit  growth  and increasing coverage. Management expects its credit cost at ~1% in the long term.

Insurance highlights: 

• Life insurance business remained under strain as reported APE declined by 26% YoY to Rs 39.8 bn. NBAP margins also continued to decline (~15.6% for 4QFY11 and 17.9% for full year), which was in-line with our estimates. Going forward, we have build in NBAP margins at ~15% for FY12E, and assumed 15% YoY APE growth.  
• ICICI Lombard General Insurance was required to provide ~Rs 2.7 bn towards  reserve for IMTPP (Indian Motor Third Party Pool) losses at 153% against 122-127% earlier (retrospectively from March-08). This has led to an impact of Rs 2.7 bn  in ICICI Lombard’s PAT. Due to this, the general insurance subsidiary reported a loss of Rs 800 mn in FY11. 

Valuations

Improving business momentum, robust asset quality, healthy margins, consistent fees income growth are the key highlights of ICICI’s 4Q result. NIMs, though improved 10 bps QoQ, likely to moderate in 1HFY12E (due to rising cost of deposits) and will be maintained at current levels in FY12E (due to re-pricing benefits and rising domestic advances share). ICICI has improved its coverage ratio to 76%, thereby creating cushion for future slippages. We expect calibrated business growth, lower credit cost and stable NIM for FY12E, will provide sufficient traction to

PAT growth (~17% YoY) – resulting in better return ratios. We reiterate our BUY rating with a target price of Rs 1,324 [2.5 x FY12E Adj. BV (adjusting for value and cost of investment) + Rs 331 value of investments]