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ICICI Bank Limited
Remarkable franchise building
Investment rationale
We firmly believe that the consolidation phase of ICICI Bank is clearly
behind us. With a well expanded distribution network, substantially improved
liability franchise and ALM profile. ICICI Bank is extremely well positioned
to participate in the credit cycle. We expect earnings to grow at 30% CAGR
over FY10-12e on the back of improving margins, steady loan growth and
lower loan provisioning resulting in RoA improving to 1.6% by FY12e.
Growth to return; our FY11e estimates at 17%
Management has revised its growth estimates for FY11e upwards from 15% to
18%, on the back of better traction in project financing and international
business. Our estimates are little more conservative at 17%. Infrastructure lending,
mortgage and auto loans within retail are likely to be key drivers of credit
growth. International business is likely to see more traction due to pick-up in
ECBs.
Improved liability franchise and ALM profile to support margins
Substantially improved CASA ratio (44% at the end of 2QFY11) and lower
mismatches between assets and liabilities will help reduce the volatility in
margins. Further, balance sheet growth for the bank will be more branchoriented
rather than DSA driven. Hence, a combination of better margins
and lower credit costs will improve sustainable profitability.
Benefits from asset quality to accrue 3Q onwards.
Accretions to NPLs from ICICI Bank were practically negligible in 2Q FY11 -
bulk of NPLs accretion has happened due to merger of BOR. Hence, we
expect credit costs to decline materially from 3QFY11 onwards as the bank
has practically achieved its 70% coverage ratio target. We estimate credit
costs to decline from 2.2% in FY10 to 1.2% in FY12e.
Valuation and recommendation
Our valuation is based on SOTP method and we value the stand-alone bank
at INR1,015/share (2.5 FY12e P/BV) based on single stage Gordon growth
model and value various subsidiaries at INR306/share arriving at a target
price of INR1,320/share and reiterate a BUY on the stock.
Investment rationale
Growth to return; FY11e estimates at 17%
After successfully executing its 4C strategy (CASA ratio, cost to income, credit costs
and capital conservation) in FY10, ICICI Bank is now gearing itself for credit growth.
Credit growth has finally expanded in 2QFY11 (5% QoQ) as retail disbursements
more or less matched retail repayment.
The bank has revised its growth estimates for FY11e, upwards from 15% to18%, mainly
due to better traction in the international business (pick-up in ECBs). Infrastructure lending,
mortgage and auto loans within retail are likely to be key drivers of credit growth.
Traction in liability franchise to boost margins
ICICI Bank has seen strong traction in savings deposits (>25% for last 4 quarters),
resulting in CASA ratio improving from 28% in FY09 to 44% currently. The bank has
doubled its branches in the last two years to ~2,500 which has aided it mobilise low
cost deposits. Further, the bank has improved gaps in its asset liability profile which
help reduce volatility in margins. Management is confident of maintaining average
CASA levels at 37% for FY11e.
Tangible benefits from improving asset quality 3QFY11 onwards
The bank has shown a remarkable improvement in asset quality trends with slippage
ratios witnessing a sharp reduction at ~0.9% in 2QFY11 from the peak of 2.7% in
1QFY10. Accretions to NPLs from ICICI bank were practically negligible - bulk of
NPLs accretion has happened due to merger of BOR.
We expect credit costs to decline materially from 3QFY11 onwards as the bank
achieved its 70% coverage ratio target. We estimate credit costs to decline from 2.2%
in FY10 to 1.2% in FY12e.
RoE to show traction FY12e onwards
We firmly believe that the consolidation phase for ICICI Bank is behind us as the bank
is shifting its focus from capital conservation to credit growth. Further, the management
has been delivering well on its articulated 4C strategy - CASA ratio (now at 44%),
costs under control (Cost to income ratio at 40%) credit costs (negligible slippages)
and strong capital base (Tier 1 ratio at ~14%). Hence, we expect earnings to grow
at 31% CAGR over FY10-12e on the back of improving margins, steady loan growth
and lower loan provisioning.
Valuation and outlook
We expect RoA for ICICI bank to rise to 1.4% by FY11e (from 1.04% in FY10) and
1.6% by FY12e as the consolidation carried out over the last few quarters begins to
yield results. The main driver of RoA in our opinion is likely to come from lower loan
provisions, as NPLs begin to trend downwards coupled with expanding margins.
We value ICICI Bank using a SoTP method and value the stand-alone bank at INR1015/
share (2.5 FY12E P/BV) based on single stage Gordon growth model and value the
various subsidiaries at INR306/share arriving at a target price of INR1,320/share
which provides 16% at current levels.
Currently, the stock trades at 2x FY12E P/BV (core book- adjusting for value in subs)
offering strong returns in the long run as sustained results from structural correction
become more visible. We reiterate a BUY on the stock at current levels.
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