Bank on it

PUBLIC ISSUE

The ICICI Bank issue is attractively priced given the bank's consistent growth and its leadership business in retail segment.

ICICI bank is India's second largest bank and the largest in the private sector, plans to raise Rs 5000 crore with a green shoe option of Rs 750 crore in the price band of Rs 505 - Rs 545 in the domestic market.

This is part of a total issue of Rs 8050 crore, including an issue of American Depository Shares worth Rs 2000 crore with a green shoe option of Rs 300 crore. Analysts note that pricing of the issue is comfortable given the bank's consistent growth and the expected re-rating of the stock due to unlocking of future value of its subsidiaries.

ICICI bank has total assets of Rs 1,89,218 crore as of September 30, 2005. This is 1.1 times its total assets in FY05. It has a wide network of 531 branches, 52 extension counters and 2030 ATMs in 371 centres across several states. Its profits and business per employee of Rs 0.11 crore and Rs 8.8 crore in FY05, respectively - are one of the highest among its peers like SBI and HDFC bank.

The bank is well geared to fulfill the overall financial need of a customer like insurance, mutual funds, investment banking and stock broking (ICICI Securities) through its subsidiaries like ICICI- Prudential Life Insurance, ICICI Lombard General Insurance, Prudential ICICI Asset Management Company-all of them largest in the private sector. It also has a venture capital arm which has invested in 300 companies in various industries and has Rs 3400 crore funds under its management.

The bank also has a substantial presence in rural areas with total client base of over one million households as against 3,50,000 in FY04. Government's thrust on pushing up agriculture credit for higher agriculture growth and in turn higher GDP is expected to boost the bank's rural business.

It plans to use the proceeds of the issue basically to meet its growing capital requirements arising out of growth in assets mainly in loan and investment portfolio and comply with regulatory requirements like Basel II. Post issue, the capital adequacy ratio of the bank is expected to be in the range of 15-17 per cent (11.52 per cent in September 2005).

Staggering growth
After the reverse merger of ICICI with ICICI Bank in 2002, the bank has grown by leaps and bounds. Its total business (deposits plus advances) have recorded a CAGR of 37.3 per cent in FY03-05. Its deposits and advances have grown at a CAGR of 44 per cent and 31 per cent respectively in FY03-05. As of September, 30 2005, deposits and advances have increased by 68.2 per cent and 56.4 per cent at Rs 1,20,452 crore and Rs 1,07,071 crore respectively.

The voluminous growth in the business has been largely led by a stupendous growth of 1242 per cent CAGR in FY03-05 in the overseas business. The share of the business outside India in the total business has increased by 4997.8 bps (basis points) in FY05 at 50.5 per cent. The bank has presence in UK, Canada, Russia, Singapore, Hong Kong, Bahrain, US, China, UAE, Bangladesh and South Africa.

Thrust on retail
India's favourable demographics and increased consumer spending is leading to a surge in the demand for loans for purchases of products such as automobiles, real estate and personal loans. ICICI bank, one of the largest players and the most aggressive in the retail sector, is expected to cash in on this demand.

Says Sejal Doshi of Mumbai-based broking firm, Angel Broking, "The bank's substantial presence in retail portfolio like home loans, auto loans, personal loans and credit cards is expected to drive higher growth in advances. That's because penetration of consumer credit, estimated at 10 "� 11 per cent of India's GDP, is relatively low compared to other countries such as Thailand, Indonesia, Malaysia and South Korea.

Retail assets of the bank at Rs 68,537 crore have grown by 73 per cent year on year in H1FY06. Share of retail finance have increased from 51 per cent in FY04 to 63.6 per cent in H1 FY06. This is mainly led by a surge in home loans assets whose share has increased from 49.7 per cent in FY04 to 52.7 per cent in H1FY06 in the total retail portfolio. The bank expects to further increase the share of retail finance in total portfolio.

NPAs on the decline
The bank has managed to lower its net NPAs/net customer assets ratio from 4.92 per cent in FY2003 to 0.97 per cent at the end of September 2005 due to various measures including restructuring, one-time settlement, aggressive recoveries, stringent risk management systems and sales to asset reconstruction companies.

Also a substantial portion of its corporate and retail loans are collateralised. However, analyst Manish Joshi of Mumbai-based Sushil Stock Brokers points out that about 5.3 per cent of its gross advances are restructured assets from loans given to iron and steel, cement and textiles companies. Any downturn in these industries will aggravate the problem of NPAs besides increasing the requirement for higher provisioning.

Commendable performance
In H1FY06, the bank's total interest income increased by 40.3 per cent to Rs 6211 crore and total Interest expenses increased by 41.6 per cent to Rs 4406 crore. The bank's overall cost of funds has come down from 7.1 per cent in FY04 to 5.8 per cent in H1FY06.

This has been largely due to the substitution of high-cost borrowings - of the erstwhile ICICI - with low-cost savings and current deposits. As a result it has increased the share of deposits from 45.1 per cent in FY03 to 63.6 per cent in H1FY06 and decreased the share of borrowings from 32.1 per cent in FY03 to 18 per cent in H1FY06.

Thus net interest income (NII) increased by 37.30 per cent at Rs 1805 crore and the bank has maintained the net interest margin (NIM) at 2.40 per cent. Operating profit has improved by 54 per cent at Rs 2020 crore due to greater control over operating costs. Net profit increased by 27.6 per cent at Rs 1110 crore and the net profit margin declined by about 300 bps at 28 per cent due to higher provisions and taxes.

Says analyst Rajesh Mahlani of domestic brokerage, Prabhudas Liladhar, "High volumes of advances and higher fee-based income will more than compensate for low net profit margins." 
 

FINANCIALS
In Rs crore	H1FY06	H1FY05	% change	FY05
Interest Income	6211	4426	40.33	9410
Interest Expense	4406	3111	41.63	6571
NII	1805	1315	37.26	2839
NIM(%)	2.40	2.40	-	2.40
Other Income	2202	1493	47.49	3416
PAT	1110	873	27.15	2005
NPM (%)	27.70	31.10	-	32.08
EPS (Rs)	15.02	12.12	-	27.55

Valuation
At the given price band, the bank trades at 2.7-3 times trailing price to book value (P/BV) of 183.7 and at 2-2.1 times its estimated price to adjusted book value for FY07E. The stock trades at an estimated price to earnings multiple of 14.9-16 times in FY07E.

The valuation is lower than that of HDFC bank, which trades at 3.5 times its price to adjusted book value in FY07E. According to Doshi, the pricing of the issue is comfortable given the bank's consistent growth and the expected re-rating of the stock due to unlocking of future value of its subsidiaries in the insurance, asset management, stock broking business etc.

However, he is of the opinion that the issue is more attractive at the lower price band. He estimates the fair value of the bank and its subsidiaries at Rs 600, which implies a return of 20 per cent from Rs 505.

Mahlani feels that existing retail shareholders may subscribe to the issue as 5 per cent is reserved for them at 5 per cent discount. Other retail bidders who are unsure about the allotment may wait as the issue is being priced more or less at the secondary market price. He advises investors to invest in the stock with a long term perspective.

Offer details
Upto five per cent of the issue i.e. Rs 250 crore is reserved for the existing shareholders with an investment upto Rs one lakh as on November 25, 2005. They are also allowed to invest upto Rs two lakh.

Retail bidders will be allotted the shares at a five per cent discount to the final issue price and they are allowed to apply for a minimum amount of Rs 1500 (Rs 150 per share on application with a minimum lot of 10 shares) and the balance payable on allotment.

Issue closes on: December 6, 2005