ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses.
In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI Bank became the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE.
In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. Consequent to the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been integrated in a single entity.
ICICI Bank currently has a network of 4,867 Branches and 14,367 ATMs across India.
Governance issue almost resolved: After the appointment of Girish Chandra Chaturvedi, who replaced Chanda Kochhar as chairman of the bank and the board’s agreement to enquiry on questionable corporate governance practices, we believe that the bank is through the governance issues which led to a significant negative sentiment against the bank. The bank’s consumer franchise and operating metrics remain healthy and we believe that the bank is poised for decent growth going forward.
Asset quality pain is largely over: ICICI Bank’s gross non-performing assets (GNPAs) as a percentage of total advances were at 9.3% at the end of H1 FY19 against 9.9% at the end of FY18. Though the improvement in H1 has not been significant, we believe that the bank has seen peak asset quality stress and slippages to NPAs will be significantly lower than what we have seen in the past.
|Amount of Gross NPA||38,085||42,552||43,148||44,489||46,039||54,063||53,465||54,489|
|Amount of Net NPA||20,155||25,451||25,306||24,130||23,810||27,886||24,170||22,086|
|% of Gross NPAs||7.9%||8.7%||8.8%||8.8%||8.6%||9.9%||9.7%||9.3%|
|% of Net NPAs||4.0%||5.4%||5.4%||5.0%||4.6%||5.4%||4.7%||4.1%|
|Provision Coverage Ratio (PCR)||57.1%||53.6%||41%||59.3%||60.9||60.5%||66.1%||69.4%|
Strong Capital base: The bank’s capital adequacy ratio (CAR) - capital to risk weighted assets - stands at 17.84% at the end of H1 FY18, which is significantly higher than the regulatory requirement of 9%. The bank is adequately capitalized for growth in the medium term. Write backs from previously written off loans will also benefit the company shore up its capital base.
Credit growth to be healthy due to the vacuum created in the market by non-bank financing companies (NBFCs): RBIs crackdown on bad loans back in the year 2015 significantly dented the lending capacity of corporate banks and public sector banks leading to the rise of NBFCs, which replaced banks with respect to lending. However, lately, NBFCs have also got into trouble as they borrowed short-term against which long term loans were disbursed, leading to asset-liability mismatches. We believe the growth in NBFC loan book will be moderate from here as they will work towards stabilizing their existing business. Banks will now replaced NBFCs in the lending segment and will see good growth in advances going forward.
Improving balance sheet with higher share of retail in loan book: Due to rise in NPAs in ICICI Bank’s corporate book in the past few years, it focused aggressively on reducing the exposure to corporates and increasing its retail exposure. The share of retail in total portfolio increased from 39% in FY14 to 57.3% in H1 FY19. Asset quality in retail was also better than the bank’s overall asset quality with GNPA of 1.73% and NNPA of 0.74%.
Advances – Break-up:
|Advances (Rs. Crore)||FY14||FY15||FY16||FY17||FY18||H1FY19|
Advances - % wise break-up:
NIM improvement will lead to higher ROE and ROA: Lower provisioning and higher credit growth will lead to higher earnings, which, in turn, will lead to better ROE and ROA. The bank will also see a reduction in cost to income ratio as operating leverage will start kicking in as the loan book grows. Cost to income ratio, currently at 38.9% is already amongst industry leading and will improve further going forward.
Other businesses to add significant value: The bank has a number of subsidiaries catering to different financial needs of customers across the country. Few of these subsidiaries are market leaders in their respective areas of operations. Some of its renowned subsidiaries are ICICI Prudential Life Insurance, ICICI Lombard General Insurance, ICICI Prudential Asset Management and ICICI Securities. We believe that the country will witness increased level of financial inclusion going forward which will benefit these businesses directly.
The Indian banking system consists of 27 public sector banks, 21 private sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative banks, in addition to cooperative credit institutions. In FY17-18, total lending increased at a CAGR of 10.94 per cent and total deposits increased at a CAGR of 11.66 per cent. India’s retail credit market is the fourth largest in the emerging countries. It increased to US$ 281 billion on December 2017 from US$ 181 billion on December 2014.
|Net Interest Income||16476.00||19040.00||21224.00||21737.00||23026.00||26205.00||31446.00|
|Pre-provisioning Operating Profit||16595.00||19720.00||23864.00||26487.00||24742.00||23283.00||28444.00|
|Provisions and Contingencies||2626.00||3900.00||11668.00||15208.00||17307.00||16900.00||9400.00|
|Profit Before Tax||13968.00||15820.00||12196.00||11279.00||7435.00||6383.00||19044.00|
|Tax Rate (%)||29.80%||29.40%||20.20%||13.10%||8.80%||20.00%||30.00%|
|Profit After Tax||9810.00||11175.00||9726.00||9801.00||6777.00||5107.00||13331.00|
|No. of Shares||634.00||637.00||659.00||663.00||661.00||661.00||661.00|
We believe that the worst is behind and the bank is relatively better placed in term of its loan book and stressed asset exposure. We also believe that ICICI Bank will be one of biggest beneficiaries of improvement in credit growth and rising financial savings in the economy. We value ICICI Bank using sum of the parts (SOTP) methodology, valuing the bank at Rs. 330 (1.75x FY20E adjusted book value) and the other businesses of the bank at Rs. 100 per share, arriving at a target price of Rs. 430.