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ICICI Bank (ICBK.BO)
3Q11 Results: Solid Rather Than Spectacular
3Q11 profits up 30% yoy, steady improvements in most parameters — ICBK’s
3Q11 performance is built on the good work already done in the previous quarters.
There was finally some loan growth (+6.4% qoq), funding mix remained healthy at
44% CASA, asset quality improved steadily and net interest margins remained flat.
It was a quarter for consolidation, not acceleration, and while most of the operating
fundamentals showed improvements – they were more solid than spectacular.
Fundamental business and mix improvements are sustained... — ICBK’s
business mix has stabilized and de-risked – a) Loans are more domestic, secured
(though international still remains relatively high); b) Funding improvement has
been sustained, augurs well for a more challenging rate environment ahead; c)
Asset quality improvements appear sustainable, near-term pressures likely low; d)
Fee income growth has picked up, now in-line with asset growth, and e) Operating
expenses are well controlled (though some pressure likely as inflation catches up).
...But still a lot to be done to push up the returns — We believe it is now time
to improve on its return profile, but there are challenges ahead: a) Sticky margins –
NIM improvements largely elusive, despite its historically high CASA suggesting
meaningful improvements; b) High reliance on wholesale funding – 40% of
deposits (plus equally large other borrowings), increases interest rate exposure; c)
NPLs still quite high – while improving, are well above industry at 4.9%, coverage
levels at 72% leave little cushion for comfort. We expect higher growth, leverage to
improve returns, but likely gradual (estimate 11-13% ROEs) rather than rapid.
Maintain Hold with revised Rs1,225 target price — We revise our EVA based
target to Rs1,225 (on slightly higher longer-term cost ratios), which is
benchmarked off a sum of parts valuation of Rs1,217 per share, including Rs183
for its non-banking subsidiaries and Rs1033 for the bank at 2.25x FY12E P/BV
(2.5x for domestic, 1.5x international). While ICBK’s business has certainly derisked, its valuations will likely be capped until returns move up meaningfully.
ICICI Bank
Valuation
Our target price of Rs1,225 is based on our EVA, which we use as our primary
methodology for the Indian banking universe because we believe it better
captures the long-term value of a business. Our EVA value is based on: a)
Long-term Cost-Income ratio of 36%; b) Long-term loan loss estimates of
110bps; c) Rs183 as estimated value of subsidiaries (FY12E); and d) Risk Free
Rate of 8%.
We also benchmark our valuation based on a Sum-of-the-Parts analysis. This
equates to Rs1,217 per share. We value ICICI Bank's domestic banking
business on 2.5x 1yr Fwd PBV (FY12E) and international business at 1.5x,
translating into an overall PBV target multiple of 2.25x 1yr Fwd. Our target
multiple is based on stable asset quality, sustained improvements in deposit
franchise and a loan growth revival. The 2.25x PBV multiple is at the lower end
of our target for comparable private banks (2.75x- 3.5x) given ICBK's still lower
return profile. The rest of the value is driven by its subsidiaries: life insurance at
Rs108, general insurance at Rs25, AMC at Rs19, ICICI Securities at Rs18,
primary dealer at Rs3, and venture fund at Rs10. The subsidiaries are valued
based on industry benchmarks.
While ICBK's target multiple is relatively high relative to returns (its cost of
capital is higher than its ROE); we believe its large presence in the market, its
capital position, and the inherent leverage of the business, should enable it to
return to higher profitability and thereafter higher valuations.
Risks
We assign a Medium Risk rating to ICICI Bank. Our quantitative risk-rating
system, which tracks 260-day historical share price volatility, suggests Low
Risk. We view a Medium Risk rating as more appropriate given the bank's large
international portfolio and its relatively lower return profile. Downside risks that
could impede the shares from reaching our target price include: (1) continued
deterioration in asset quality; (2) low margins, with a limited cushion if there is
further downside pressure; (3) aggressive international operations where
returns appear low and risk levels relatively high; and (4) inability to leverage
capital, which keeps ROEs low. Upside risks to our target price include; (1)
quicker than expected asset improvements; (2) rapid improvement or
unwinding of the international book; and (3) capital markets momentum, which
could provide upside to its financial services businesses
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank (ICBK.BO)
3Q11 Results: Solid Rather Than Spectacular
3Q11 profits up 30% yoy, steady improvements in most parameters — ICBK’s
3Q11 performance is built on the good work already done in the previous quarters.
There was finally some loan growth (+6.4% qoq), funding mix remained healthy at
44% CASA, asset quality improved steadily and net interest margins remained flat.
It was a quarter for consolidation, not acceleration, and while most of the operating
fundamentals showed improvements – they were more solid than spectacular.
Fundamental business and mix improvements are sustained... — ICBK’s
business mix has stabilized and de-risked – a) Loans are more domestic, secured
(though international still remains relatively high); b) Funding improvement has
been sustained, augurs well for a more challenging rate environment ahead; c)
Asset quality improvements appear sustainable, near-term pressures likely low; d)
Fee income growth has picked up, now in-line with asset growth, and e) Operating
expenses are well controlled (though some pressure likely as inflation catches up).
...But still a lot to be done to push up the returns — We believe it is now time
to improve on its return profile, but there are challenges ahead: a) Sticky margins –
NIM improvements largely elusive, despite its historically high CASA suggesting
meaningful improvements; b) High reliance on wholesale funding – 40% of
deposits (plus equally large other borrowings), increases interest rate exposure; c)
NPLs still quite high – while improving, are well above industry at 4.9%, coverage
levels at 72% leave little cushion for comfort. We expect higher growth, leverage to
improve returns, but likely gradual (estimate 11-13% ROEs) rather than rapid.
Maintain Hold with revised Rs1,225 target price — We revise our EVA based
target to Rs1,225 (on slightly higher longer-term cost ratios), which is
benchmarked off a sum of parts valuation of Rs1,217 per share, including Rs183
for its non-banking subsidiaries and Rs1033 for the bank at 2.25x FY12E P/BV
(2.5x for domestic, 1.5x international). While ICBK’s business has certainly derisked, its valuations will likely be capped until returns move up meaningfully.
ICICI Bank
Valuation
Our target price of Rs1,225 is based on our EVA, which we use as our primary
methodology for the Indian banking universe because we believe it better
captures the long-term value of a business. Our EVA value is based on: a)
Long-term Cost-Income ratio of 36%; b) Long-term loan loss estimates of
110bps; c) Rs183 as estimated value of subsidiaries (FY12E); and d) Risk Free
Rate of 8%.
We also benchmark our valuation based on a Sum-of-the-Parts analysis. This
equates to Rs1,217 per share. We value ICICI Bank's domestic banking
business on 2.5x 1yr Fwd PBV (FY12E) and international business at 1.5x,
translating into an overall PBV target multiple of 2.25x 1yr Fwd. Our target
multiple is based on stable asset quality, sustained improvements in deposit
franchise and a loan growth revival. The 2.25x PBV multiple is at the lower end
of our target for comparable private banks (2.75x- 3.5x) given ICBK's still lower
return profile. The rest of the value is driven by its subsidiaries: life insurance at
Rs108, general insurance at Rs25, AMC at Rs19, ICICI Securities at Rs18,
primary dealer at Rs3, and venture fund at Rs10. The subsidiaries are valued
based on industry benchmarks.
While ICBK's target multiple is relatively high relative to returns (its cost of
capital is higher than its ROE); we believe its large presence in the market, its
capital position, and the inherent leverage of the business, should enable it to
return to higher profitability and thereafter higher valuations.
Risks
We assign a Medium Risk rating to ICICI Bank. Our quantitative risk-rating
system, which tracks 260-day historical share price volatility, suggests Low
Risk. We view a Medium Risk rating as more appropriate given the bank's large
international portfolio and its relatively lower return profile. Downside risks that
could impede the shares from reaching our target price include: (1) continued
deterioration in asset quality; (2) low margins, with a limited cushion if there is
further downside pressure; (3) aggressive international operations where
returns appear low and risk levels relatively high; and (4) inability to leverage
capital, which keeps ROEs low. Upside risks to our target price include; (1)
quicker than expected asset improvements; (2) rapid improvement or
unwinding of the international book; and (3) capital markets momentum, which
could provide upside to its financial services businesses
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