ICICI Bank – Dwarfed by comparison :: RBS

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ICICI Bank has shrunk its balance sheet and improved its liability mix over the past few
years. We believe this will help maintain margins, although still below the bank's peers in our
coverage universe. However, the sharp rise in interest rates poses a challenge. We thereby
raise COE and downgrade to Hold.
Improved liability mix, but still stretched relative to peers
ICICI Bank’s average low-cost deposits (CASA) ratio was 39% in 2QFY11 (+700bp yoy).
Wholesale deposits (ie, those originated by the wholesale business division and more
sensitive to interest rates) were about 35% of the total and the balance (24-25%) were retail
term deposits (originated by the retail business and largely linked to card rates). However,
the proportion of deposits maturing in FY11 and the concentration of the bank’s top-20
depositors is high relative to peers’ (see Charts 2 and 3). ICICI Bank shrunk its balance
sheet by 2.5% from March 2008 to September 2010 while simultaneously improving its
liability mix. We believe the balance-sheet restructuring will help cushion the impact on net
interest margins (NIM) in a rising interest rate environment.
NIM relative to peers’ likely to remain under pressure
At end-March 2010, ICICI Bank had Rs128bn invested in subsidiaries/joint ventures and
Rs101bn in Nabard’s Rural Infrastructure Development Fund (or RIDF) to meet a shortfall in
priority-sector lending). These investments together constituted about 7.5% of interestearning assets (5.7% at end-March 2009). The investments in subsidiaries earn no interest,
while the RIDF sum earns 4.5-5% (weighted average). Assuming an 8-9% opportunity
interest cost for these investments, we calculate that the negative impact on NIM works out
to 40-50bp. Reported NIM was 2.5% in FY10, with margin for the domestic business (about
80% of assets) at about 3.0% and for international business at about 50bp (20% of assets).

No earnings forecast change; downgrading to Hold on a higher COE in line with peers
We keep our earnings estimates unchanged but factor in a cost of equity (COE) of 14% (13%
earlier) to arrive at an SOTP-based target price of Rs1,154, down from Rs1374.00. Thus, we
downgrade ICICI Bank to Hold from Buy given the low upside potential. The downgrade partly
reflects our cautious view on the sector, which has been due to a combination of high inflation,
widening trade deficit and rising loan growth putting a strain on domestic liquidity. We expect the
macro environment to remain challenging in the medium term (see Sanjay Mathur’s 3 January
2011 report, A tough 2011) and, thus, foresee a higher cost of equity.