ICICI Bank- 2Q FY11: De-risked Performance: Citi

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ICICI Bank (IBN)
2Q FY11: De-risked Performance
 2Q11 profits up 19% YoY, 14% ahead of our estimate — Fundamentally, 2Q11
seems to be a healthy quarter for ICBK – a balanced performance on growth,
profitability and asset quality. There was loan growth (though modest ex-BOR),
NIMs improved a bit, overall profitability was supported by better asset quality
performance. But the key highlight, in our opinion, was the continued
improvement in ICBK’s funding franchise (44% CASA now). Overall, ICBK’s return
profile now seems largely de-risked and should hold hereon.

 Business and return profile appear to be on a stronger footing... — ICBK’s
business mix and return profile seem to have largely de-risked – a) NIMs have
stabilized, some improvements likely from international book, b) trading gains
have evaporated, c) fee income growth has re-started, though still predominantly
corporate led, d) loan loss charges are likely to decline as asset quality stabilizes,
and e) deposit mix has continued to improve meaningfully, providing enough room
to maneuver a difficult interest rate environment.

 ...however, pace of further improvement likely to be gradual — Fundamentally,
however, further improvements are likely to be gradual – a) NIM improvements
will be slow at best, given its high international, mortgage and corporate mix, b)
costs have already been pared down to the bones, c) incremental asset
delinquencies are near zero in 2Q, and d) fee income in retail segments is still
sluggish and will take time to recover. While loan growth is likely to drive earnings,
key operating ratios should largely remain stable.


 Raising target price, but valuations a challenge — We raise our EVA-based
target price to $57.76 from $48.05, but maintain a Hold (2M) rating. We
now benchmark ICBK’s core banking business at 2.35x FY12E P/BV (2.7x
for domestic, 10% discount to Axis; and 1.25x for international) and believe
ICBK’s return profile needs to improve meaningfully to warrant continued
upward rerating. We roll forward our base year to FY12E. SBI remains our
top sector pick.