HDFC sec recommneds BUY ICICI bank

ICICI Bank, having largely completed the restructuring exercise, is well positioned to
capitalize on the uptick in the economy. Margins, which are likely to remain subdued in
the near term, are expected to move up given the bank’s improving deposit mix,
comfortable capital adequacy and control on fresh slippages over FY12-13E. Benefits of
merger with Bank of Rajasthan will be realized only in FY12-13E as branch and employee
efficiency improves. We estimate the bank will realize a CAGR of 25% in net profit over
FY10-13E. Moderating fresh slippages will result in credit costs of cf.1% by FY13E from
2.2% in FY10. We estimate the ROE will improve to 13.4% in FY12E and 16.6% in FY13E.
Initiate coverage on ICICI Bank with a BUY rating and a target price of Rs1,350/share
based on sum of the parts valuation.
Multiple drivers to ensure profitable growth, but in the long term
Having completed the restructuring exercise, ICICI Bank has renewed its focus on credit
growth. We estimate the loan book will grow 23% CAGR over FY10-13E driven by corporate
and retail loans (home and auto loans). Margins are likely to remain under pressure in the
short term due to competitive pressures and rising cost of deposit. But we expect the
margins to improve in FY12 and FY13 driven by a) rising proportion of domestic book (from
74% to 84%), b) improvement in margins on international book and c) rising proportion of
loan book funding from low cost deposits (average of cf.44% from CASA deposits).
Earnings to grow 25% CAGR over FY10-13E; ROE to improve to cf.17%
Driven by a healthy topline growth of 16%, core fee income growth of 21% and moderating
credit cost from 2.2% to cf.1% in FY13E, earnings are likely to grow 25% CAGR over FY10-
13E. However, the operating efficiency of the bank is likely to deteriorate in the near term
due to higher wages and expansion of distribution network. But we expect the cost/income
(ex-treasury) to improve by 420bps to 40% over FY11-13E as branch and employee efficiency
improves. The ROE which has been one of the main concerns of investors is likely to
improve from 10.6% to 16.6% on account of improving profitability and increasing leverage.
Re-rating hinges on growth & profitability; BUY with target price of
Rs1,350/share
ICICI Bank has addressed one of the main concerns of investors on asset quality by arresting
fresh slippages. While this has resulted in a re-rating of the stock (up 76% since Lehman
collapse), we believe for further re-rating the bank will need to effectively manage growth
with profitability. In our view, the bank is well positioned to capitalize on the economic
uptick. Initiate coverage with a BUY and a target price of Rs1,350/share.