ICICI Bank - Reasons to cheer:: RBS

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ICICI Bank
Reasons to cheer

ICICI Bank reported strong operating performance in 2Q. Going forward, ROAs
should improve from a combination of better NIMs, a steady ratio of operating
cost to assets and declining provision for bad loans. Further, the high Tier-1
capital ratio provides sufficient room for growth. Buy; TP raised to Rs1,374.


2QFY11 (including e-BoR): Core earnings improve, asset quality stable
After a prolonged lull, net interest income grew 8% yoy (up 11% qoq) in 2QFY11.Global
margins improved 20bp yoy to 2.6% (flat qoq). Excluding the Bank of Rajasthan (BoR) loan
book of Rs65bn, ICICI Bank’s standalone loan book grew about 2% qoq (up 4% in 1HFY11).
Management guides for 18-20% yoy loan growth in FY11, largely driven by growth in the
corporate loan book. According to management, the qoq increase in GNPLs is mainly due to
the merger of e-BoR.
Building a case for margin expansion…
Low-cost deposits grew 35% yoy and were about 40% of total deposits in 2QFY11. We
believe this will keep the cost of deposits in check. Further, yield on loans appears to have
bottomed out at 8.3% in 2QFY11, partly given that gross NPLs have now stabilised. We
believe, going forward, that domestic NIMs will likely inch up to 3.4-3.5% (in line with banks
with a similar deposit mix) from 3% in 2QFY11. As regards overseas business, we assume
NIMs remain largely stable at the current 80-100bp. Given the loan mix (75% domestic and
25% overseas), this translates into NIMs of 2.9-3.0% in FY12-13F (2.6% in 1HFY11). Note,
our estimates factor in a 30bp improvement over FY11-FY13.
... stable operating cost-to-assets ratio and declining credit costs should boost ROAs
ICICI Bank has been able to maintain its ratio of operating costs to assets at about 1.6% of
assets in 1HFY11. Further, asset quality appears to be stable, given that incremental
addition to gross NPLs has been trending downwards. We expect credit costs to come down
to 106bp of loans in FY12 (232bp in FY10, 117bp in FY11F).
Raise earnings estimates; maintain Buy with a SOTP-based target price of Rs1,374
A combination of margin expansion, a stable ratio of operating costs to assets and declining
credit costs will likely drive ROAs to 1.5% by FY12-13 and core ROEs to c15%. We raise our
FY12F earnings of the standalone banking business, roll forward our valuations of the parent
and nonbanking businesses to FY12F and arrive at a SOTP-based TP of Rs1,374. Buy