ICICI Bank's consolidated and standalone second-quarter 2016 earnings rose 12% each over the prior year, modestly behind our expectations as asset quality continues to weigh down performance. Consolidated earnings for the first half were at Rs 67 billion versus our Rs 145 billion full-year estimate, as operating profits grew 11%, but provisions grew faster at 15%.
Return on equity, or ROE, for this narrow moat firm continued to improve crossing 15% in the first half, and much above our estimated cost of equity of 12%. Standalone bank ROE was lower at 14%. Our hypothesis plays out as the insurance subsidiaries begin to improve profitability of the consolidated entity. We see further improvement in insurance profits as a trigger for the stock price to meet our unchanged Rs 327 per share fair value estimate. The stock is currently undervalued (trading in the four-star range).
Advances (up 13%) and deposits (up 9%) grew at a healthy pace, matching our 12% and 9% five-year growth assumptions. Net nonperforming loans at 1.47% of loans versus 1.40% last year, continue to rise and remain our key concern. We revise our loan loss assumption upwards, which has a less than-5% impact on our fair value estimate and gets netted off against the time-value-of-money since our last update. Provision coverage ratio of 57% is much below the 70% maintained by Axis Bank and HDFC Bank, and we believe the bank would be wise to be more prudent here. Overall, we think ICICI Bank is a standard allocator of shareholder capital.
ICICI Bank announced that its Canadian joint-venture partner Fairfax will be increasing its equity stake to 35%, from 26%, in its general insurance subsidiary, ICICI Lombard. The slated transaction values the subsidiary at Rs 172 billion, or 32 times price-to-2015 earnings ratio, which we think is a steep valuation and represents the scarcity premium of the lack of pure-play private insurance firms listed in the Indian capital markets.
While the stake sale means higher minority interest outflow for ICICI Bank at the consolidated net income level, we are not perturbed by this. Had this stake increase happened last year, consolidated net income would have dropped by a mere 0.5%. ICICI holds 9% market share of India's general insurance industry which has been growing in double digits, with private insurers growing faster.
