Buy ICICI Bank-Revising target price and EPS says Nomura

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 Action
We are increasing our PT to Rs1,355 from Rs1,040, as we lower our sustainable
credit cost to 0.6% from 0.9%, following the turnaround in asset quality in 1QFY11,
which we think is likely to improve further in the quarters ahead. We expect the
earnings turnaround seen in 1QFY11 to gather momentum in the quarters ahead
with a pick-up in loan growth and lower credit costs. Maintain BUY.
 Catalysts
We believe ICICI Bank will outperform peers in terms of core earnings growth and
asset quality sequentially. Strengthening deposit franchise will be a key positive.
Anchor themes
With loan growth having likely moderated in 2QFY11 and deposit rates rising, we
recommend banks with strong deposit franchises.




Revising target price and EPS
 Upgrading price target, maintain BUY
We are upgrading our price target for ICICI Bank to Rs1,355 as we
lower our sustainable credit cost to 0.6% from 0.9%. ICICI Bank’s
delinquencies have been declining consistently since 3QFY10, and
credit costs have started coming off since 1QFY11. We expect
delinquencies and credit costs for ICICI Bank to improve further as the
unsecured loan book has run off and because ICICI Bank consciously
contracted its balance sheet over the last two years. We value the
parent bank at 2.6x P/BV FY12F (against 1.8x earlier) based on
sustainable RoA of 1.4% against 1.2% earlier. We value the foreign
banking subsidiaries at 1.5x P/BV. We have lowered the value of nonbanking
subsidiaries to Rs168 per share from Rs202 earlier due to
lower value for life insurance. We believe ICICI Bank is likely to
outperform its peers in earnings growth, consistency and asset quality
from hereon.
 Earnings turnaround to gather momentum.
ICICI Bank’s earnings turned around in 1QFY11, after two years of
slowdown. We expect sequential loan growth of 5% in 2QFY11F,
better than the sector’s 2.5%. We expect loan growth to pick up
substantially in 2HFY11, as repayments slow. We also expect credit
costs to decline further from Rs8bn in 1QFY11 to Rs5bn in 4QFY11F,
ie, from 1.7% in 1QFY11 to 1.3% for FY11F and 1% in FY12F.
 Improving returns, high visibility of earnings
We expect the bank’s core RoE to expand from 10.0% in FY10 to
13.5% in FY12F, driven by a pick-up in loan growth, stable margins, a
higher loan-to-asset ratio and declining credit costs. We see the
lowest downside risks to our earnings forecasts for ICICI Bank relative
to other banks, given its low base and improving deposit mix.