ICICI BANK -- Consolidation off, growth on:: Edelweiss

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ICICI Bank reported PAT of INR 12.4 bn (19% growth) in Q2FY11, ahead of our
estimate of INR 11.9 bn, aided by lower credit cost and marginally higher NII (owing
to 10bps improvement in margins). Key highlights of the quarter were:
(1) Sequential pick up of 1.7% in loan book (ex BoR) led by INR 78 bn of retail
disbursements (matching prepayments/repayments after a long while) on course to
achieve the revised target of 18-20%; (2) pace of decline in NPL formation maintained
at less than INR 1bn from the average FY10 run-rate of INR 7 bn; (3) improvement in
provisioning coverage by 400bps to 69%, closer to the 70% goal post (earlier than the
March 2011 deadline); (4) story on improving liabilities franchise continues unabated
with 12% Q-o-Q increase in saving bank balances, resulting in CASA ratio inching
higher to 44%; (4) trend of decline in opex cost reversed with a 6% increase in cost,
with 8.5% hike in staff expenses, led by salary increments and bonus provisions; (6)
no untoward surprise on the merger with Bank of Rajasthan towards asset quality and
harmonization impact; and (7) steady pick up (15%) in fee income after a subdued
previous quarter, offsetting the INR 1.44 bn treasury hit.
􀂄 Consolidation over; growth to take center stage
The key highlight of the quarter was the strong pick up in ICICI Bank’s retail
disbursement to INR 78 bn which matched retail repayment, leading to modest
pick up of 1.8% Q-oQ in retail book (put to end eight quarters trend of shrinkage).
Excluding the merger impact, loan book grew at 1.7% Q-o-Q, corporate/sme
segment reporting 13% pick up. Reversal of rupee depreciation led to international
loan book remaining muted-1.3% Q-o-Q. With consolidation largely over,
management guided for revised loan book growth of 18-20% from the earlier 13-
14%, delta largely coming from the international segment (expected to deliver
single digit growth against negative to zero earlier) and retail.
􀂄 Outlook and valuations: Re-rating in progress; maintain ‘BUY’
With the final ‘C’ of the 4C strategy, credit quality, falling in place, we believe
ICICI Bank is all set to switch from consolidation to the growth phase (FY11 loan
book growth targets upped to 18-20% against 13-14% earlier) with a leaner and
more robust business model (40% CASA is here to stay). Signaling end of the
consolidation phase, the bank has added two more Cs to its overall strategy—
credit growth and customer service dropping capital conservation. Core RoA will
improve meaningfully to 1.6% by FY12E, largely buoyed by decline in credit cost
in the initial phase but ably supported by better NIMs profile in the next phase.
Valuing the core book at 2.3x in the interim, with the potential for further rerating
as return ratios improve. Valuing the subsidiaries at INR 195, we arrive at
a revised target price of INR 1,298. We maintain ‘BUY/ Sector Outperformer’
recommendation/rating on the stock.