ICICI Bank Equity Research

Date of Research – 22 January 2016

Price – Rs. 233.00

About the Company

ICICI Bank Limited (“ICICI” or the “Bank”) was incorporated in 1955 and has its registered office in Baroda, Gujarat and its corporate office in Mumbai, India. ICICI along with its subsidiaries is engaged in providing a wide range of banking and financial services in retail banking, wholesale banking and treasury operations.

ICICI has operations in 19 countries, including India and as of March 31, 2015, it had a branch network of 4,050 branches, the largest among private sector banks in the country, and an ATM network of 12,451 as compared to 11,315 at March 31, 2014.

For FY 2017, ICICI’s net interest margins stood at a healthy 3.96 % (3.25 % for FY 2016). For the same period, net NPA’s stood at 4.89 % (2.67 % for FY 2016) which is slightly higher from the industry average for private banks.

The Bank has maintained its CASA account ratio at 50.40 % as compared to 45.80 % for FY 2016.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Interest earned44,884.5949,479.2454,964.0059,293.7160,939.98
Interest expended28,285.4129,710.6132,318.1533,996.4734,835.83
Net Interest Income16,599.1819,768.6322,645.8525,297.2426,104.15
Other income29,319.8130,084.6135,252.2342,102.1452,457.65
Operating expenses30,207.0630,666.3535,022.7140,789.5648,169.97
Operating Profit15,711.9319,186.8922,875.3726,609.8230,391.83
Provisions (other than provisions for tax) and contingencies2,095.172,900.264,536.348,705.4116,582.48
Exceptional Items3,600.00
PAT (before Minority Interest and share of Associates)10,129.8811,677.1212,942.3010,926.8911,340.33
Profit/ (loss) attributable to Minority Interest746.93
Share of profit / (loss) of Associates526.27635.75695.431,151.95
Consolidated Profit / (Loss) for the year9,603.6111,041.3712,246.8710,179.9610,188.38

Profitability Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Net Profit Margin Ratio13.6514.6814.3510.7810.00
Cost to Net Income Ratio65.7861.5160.4960.5261.31
Other Income to Net Income Ratio63.8560.3560.8946.7066.77

Net profit margin is arrived at by dividing profit after tax by the total income generated (i.e. interest earned plus other income) and shows what is left for the shareholders as a percentage of total income.

Cost to net income ratio is particularly important in valuing banks. It is derived by dividing operating expenses by the net income generated (i.e. net interest income plus the other income). The ratio highlights the efficiency with which the bank is being run – the lower it is, the more profitable the bank will be. If this ratio rises from one period to the next, it means that costs are rising at a higher rate than income. Together these ratios help in understanding the cost and profit structure of the bank and analysing business inefficiencies.

Other income largely constitutes of fee income such as commission and brokerage fees and client based merchant foreign exchange trade, service charges from account maintenance, transaction banking (including cash management services), syndication and placement fees, processing fees from loans and commission on non-funded products (such as letters of credit and bank guarantees) etc. Banks in developed countries derive nearly 50% of their income from these non-funded sources. A high other income to net income ratio is good for the bottom line (i.e. net profit) as income from this stream is derived without significant mobilisation of deposits and hence the cost associated with this income is relatively lower compared to interest income.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital1,152.771,153.641,155.041,159.661,163.17
Reserves & Surplus60,121.3467,604.2975,268.2383,537.4492,940.85
Employee stock options grants2.394.486.577.446.70
Net worth (shareholders funds)61,276.5068,762.4176,429.8584,704.5494,110.71
Minority Interest1,427.721,705.762,010.762,505.813,355.64
Other liabilities and provisions98,240.101,16,694.791,26,030.311,41,661.561,49,834.79
Total Liabilities6,04,191.416,74,821.717,47,525.688,26,079.179,18,756.20


Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets5,431.985,473.465,506.835,871.218,713.46
Cash and balance with RBI20,728.1819,306.2022,096.9325,837.6727,277.56
Balances with banks and money at call and short notice20,428.1130,064.6626,161.3021,799.5037,758.41
Other Assets25,613.6334,336.5938,809.4031,319.0765,233.57
Total assets6,04,191.416,74,821.717,47,525.688,26,079.179,18,756.20

Efficiency Analysis

ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Advances / Loan Funds Ratio65.9167.6671.3373.4273.53
ROE / RONW12.4713.9714.4514.0411.21

Advances to Loan funds ratio: This ratio indicates the efficiency with which the bank is able to deploy the funds it mobilises and is arrived at by dividing the banks total advances by its total deposits (i.e. deposits + borrowings). A high advance to loan fund ratio indicates that the bank might not have enough liquidity to cover any unforeseen fund requirements; if the ratio is too low, banks may not be earning as much as they could be.

Return on Equity (ROE) or Return on Net Worth (RONW) : measures the amount of profit which the company generates on money invested by the equity shareholders (i.e. share capital + reserves and surplus). In short, ROE draws attention to the return generated by the shareholders on their investment in the business. ROE is widely used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Net Interest Income Rs.16,599.1819,768.6322,645.8525,297.2426,104.15
Growth (%)27.87 %19.09 %14.55 %11.71 %3.19 %
PAT (Rs. Cr.)10,129.8811,677.1212,942.3010,179.9611,340.33
Growth (%)27.62 %15.27 %10.83 %(15.57 %)11.40 %
Earnings Per Share – Basic (Rs. )16.6619.1321.1717.5317.51
Earning Per Share – Diluted (Rs. )16.6619.1320.9417.4117.43
Price to Earnings16.5714.2622.0517.4118.12

Dividend History

The Company has maintained an average dividend yield of 2.11 % over the last 5 financial years.

Liquidity and Credit Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Net Interest Margin Ratio (“NIM”)3.113.333.483.253.96
Capital Adequacy Ratio18.7417.7017.0216.6417.39
Net NPAs0.640.821.402.674.89

NIM: Banks focus on lending or advancing money at a rate higher than the rate at which they accept deposits. Net Interest Margin is calculated by dividing the difference between Interest earned (on advances) and interest expended (on deposits) by the amount of (average) Invested Assets. If this ratio rises from one period to the next, it indicates that the bank is able to deploy its funds more efficiently which results in greater profitability.

Capital Adequacy Ratio (CAR): or Capital to Risk Weighted Assets Ratio (CRAR) is a measure of a bank’s capital (net worth plus subordinated debt) expressed as a percentage of a bank’s risk weighted credit exposures (loans).

Two types of capital are measured: tier I capital, which can absorb losses without a bank being required to cease trading (such as ordinary share capital and free reserves); and tier II capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors (such as long term unsecured loans and revaluation reserves which is taken at a discount of 55 % while determining its value for inclusion in Tier II capital).

Measuring credit exposures requires adjustments to be made to the amount of assets shown on a bank’s balance sheet. This is done by weighting the loans made by a bank according to their degree of riskiness, e.g. loans to Governments are given a 0 %weighting whereas loans to individuals are weighted at 100 %. Similarly off-balance sheet items such as guarantees and foreign exchange contracts are also weighted for their riskiness. On-balance sheet and off-balance sheet credit exposures are added to get total risk weighted credit exposures.

As per the Basel II norms the minimum capital adequacy ratios that apply are:

Tier I capital to total risk weighted credit exposures to be not less than 4 %;

Total capital (Tier I plus Tier II less certain deductions) to total risk weighted credit exposures to be not less than 8%.

The RBI currently prescribes a minimum capital of 9 % of risk-weighted assets, which is higher than the internationally prescribed percentage of 8 %.

Applying minimum capital adequacy ratios serves to protect depositors and promote the stability and efficiency of the financial system.

For details on classification of tier I and tier II see https://rbidocs.rbi.org.in/rdocs/notification/PDFs/62CB300611FL.pdf

NPA: Non Performing Asset or NPA is a classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset. Any rise in the percentage of NPAs results in a sharp decline in the overall profitability.

Ownership pattern

ICICI is one of India’s biggest professionally managed companies with no clear promoter group. Many financial institutions hold varying amounts of stakes in ICICI but no one in particular exercises significant influence in decision making. This gives the management enormous freedom and autonomy in diversification.

In the latest stock exchange filing dated 31 March 2017, institutional holding in ICICI stood at 61.97 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.