ICICI Bank; growth taking precedence; we upgrade to ADD.:: Kotak Sec

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ICICI Bank (ICICIBC)
Banks/Financial Institutions
Changing outlook; growth taking precedence; we upgrade to ADD. We expect
loan growth to gather pace from 3Q onwards, with likely better margins on the back of
improving funding mix (CASA at 44%). A sharply reduced provisioning expense (on back of
sharply lower slippages) will further add to profitability. Even in 2Q, margins improved as
deposit costs were sustained while lower provisions supported earnings. With RoAs ranging
at 1.4-1.6%, RoEs will be on an improving trend, as balance sheet leverage improves –
expect RoEs of 15% on banking book. We upgrade to ADD with a TP of `1,230.





Loan growth now in line with the industry; funding mix has improved considerably; upgrade to
ADD
The outlook on loan growth, margins and asset quality has clearly turned positive for ICICI Bank
and we see this driving profitability for ICICI Bank and medium-term stock performance. After
about 8 quarters, we see retail loans growing sequentially as disbursements continue to improve
while outlook on domestic loans continues to remain positive. Further, reasonably strong funding
mix (CASA at 44%, avg. CASA at 39% in 2Q) has resulted in a positive bias for NIMs. Our target
price at `1,230, values the bank at 2.3XFY2012E core bank book and 16XFY2012E core earnings.
Loan book grows by 2% qoq (standalone); 5% including BoR
Loans grew by 2% (adjusted for BOR) sequentially, in line with the industry to `1.87 tn as of
September 2010. Including BoR, growth was at 5% qoq (2% yoy) to `1.94 tn. Incremental growth
was mainly driven by corporate/SME segment (positive impact from BoR). Retail loans have finally
started growing, up 2% qoq, after a continuous decline over last 8 quarters, mainly driven by
mortgages. Retail disbursements have been consistently improving—`78 bn in 2QFY11 compared
to `55 bn in 1QFY11. We expect the pace in retail growth to pick up further in coming quarters,
while the near-term growth is likely to be driven by corporate sector. We expect loan book to
grow by 17% in FY2011E and 20% in FY2012E.
Margins improve 10 bps qoq to 2.6%
Margins improved by 10 bps qoq to 2.6%, as higher investment yields more than offset the
increase in funding costs (KS calc.). Management highlighted that the improvement was led by
reset in floating papers and rise in interest rates. Lending yields was flat qoq at about 8.3% as
environment continues to remain competitive coupled with a continued shift towards secured
assets. Overall, the international book (which is 25% of loans) has a margin of 80 bps (up from 50
bps in previous quarter), while the domestic book has a margin of about 3.0%.


CASA ratio increased further to 44%; branch addition led by merger
Deposits grew by 13% yoy (11% qoq) to `2.2 tn aided somewhat by the merger.
Unadjusted for the merger, deposits grew by 6% yoy (4% qoq). CASA ratio for the quarter
improved to 44% from 42% in June 2010. CASA deposits grew healthily, a commendable
improvement over the past few quarters; by 27% yoy (9% qoq) led by strong growth in
current deposits. At the time of merger, Bank of Rajasthan had a CASA ratio of 35%. Post
merger, ICICI Bank has increased its branch network to 2,500 (compared to 2,016 in June
2010) with a 3-year target of 4,000 branches. We maintain a favourable outlook on the
bank’s CASA ratio as productivity improves of not only for BoR branches but also those
opened in the past three years (700 branches since FY2008).
Fee growth of 15% impressive led by corporate and international business
Overall fee growth was impressive at 15% yoy, a sharp improvement from 7% yoy reported
in 1QFY11. The management highlighted that retail fees have stabilized while the growth
for the quarter was driven by higher contribution from corporate and international business.
Non interest income declined 13% yoy mainly due to treasury loss of `1.4 bn (related to
investment depreciation provisions and MTM on security receipts). A more sustainable trend
should be visible given that balance sheet growth trends are emerging very strongly.
Asset quality stable despite the merger; coverage increases to 69%
The quarter saw ICICI Bank almost meeting the regulatory target of 70% provisioning
coverage – this should help lower provisioning charges and aid earnings going forward. The
bank made provisions of `6.4 bn largely towards NPLs and, consequently, net NPLs declined
to `32 bn (net NPA down to 1.6% from 1.9% qoq). Provisions will broadly track net
slippages and given the subdued business growth in recent years, we see this declining
steadily over the next few quarters. We are building loan loss provisions at 1.3% for FY2011
and 0.9% for FY2012.

Reported gross NPLs were up by 3% qoq, with the bulk of the increase coming from the
merger with Bank of Rajasthan. Increase in gross retail NPLs shows that the bulk of NPL has
come from the retail book (probably of Bank of Rajasthan). Restructured assets declined `26
bn (1.3% of loans), on back of up-gradations of few corporate loans compared to `37 bn
(2% of loans).