Outperformer rating to ICICI Bank shares: IDFC

Nov 04 2013, 11:34 IST
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SummaryOperating costs down; asset quality remains a concern

Q2 result highlights

* ICICI Bank's Q2FY14 profits were up 20% y-o-y, 6% above our estimates, primarily on lower-than-estimated operating costs. Operationally, it was another steady quarter, confirming improvements from previous quarters—stable NIMs (net interest margins), revival in fees, lower operating costs, but moderate loan growth.

n NIMs were flat q-o-q, management gets more confident, ups guidance to 330 basis points.

* Fee income growth continued to improve–now at 16% y-o-y, management confident of sustaining growth closer to current levels.

* Operating costs were down 7% q-o-q, with employee costs down 20% q-o-q—on lower retirement costs and variable compensation.

* Asset quality however, shows no signs of improvement–incremental slippages and credit costs remained elevated (but stable quarter-on-quarter) at 1.5% and 80bps. However, restructured loans were up 15% q-o-q to 2.1% of loans and the pipeline remains high. Expect slippages to remain stable.

Other highlights

* ICICI Bank’s overall NIMs in Q2 were largely flat q-o-q at 330bp. This was due to reduction in its cost of funding in both domestic and overseas businesses as well as an improvement in its average CASA mix (up to 40% of total deposits).

* NIMs on international business increased to 180bps (160bps in Q1) domestic NIMs were at 365bps (flat q-o-q). The sharp improvement in international NIMs was also helped by deployment of excess liquidity in overseas branches.

* Employee costs in Q2 fell steeply to R8.7bn. The management attributed this decline to lower variable compensation for employees as well as lower provisions for retirement benefits due to high interest rates prevailing in the quarter.

* This is likely to normalise ahead, but the cost-income ratio should remain below 40% ahead.

* Total MTM (mark-to-market) losses on bond portfolio stood at R2.79 bn and the bank booked entire losses in Q2 itself. As allowed by the RBI, the bank shifted AFS/HFT (available-for-sale/held-for-trade) securities of R23.1bn to HTM (held-to-maturity) category resulting in R100m loss.

Key positives: Lower operating costs, robust fee growth, strong CASA mix (43%).

Key negatives: Elevated incremental slippages, restructurings and credit costs.

Valuations & view: The bank’s strong liability focus and improvement in CASA mix has been one of its key operating highlights, leading to greater balance sheet stability and profitability. Its steady focus on improving NIMs, fees and operating expenses should provide higher earnings than balance sheet growth medium term. Maintain Outperformer.

IDFC Institutional Securities

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