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Operating parameters in place; Growth is the key
Structural improvement in RoA to 1.5%; Top pick, Buy with the target price of Rs1,385
After a period of consolidation over the past two years, focus has shifted to growth, with
corporate, autos and home loans being key drivers. Over FY11-13, domestic business
growth is expected to be above the industry growth with CASA ratio expected to remain
at 40%+. Stable/improving margins, control over cost-to-income ratio and a fall in credit
costs will ensure RoA of ~1.5% over FY11-13. Strong CAR of 20% with tier-I ratio of ~14%
will ensure dilution-free growth.
Execution of 4 Cs strategy commendable: ICICI Bank's execution on 4Cs strategy
has been commendable, with (1) average CASA ratio improving to ~40% (from 22% in
FY07), (2) cost-to-core income declining to ~42% from 58% in FY07, (3) NNPA declining
to 1.2% with improved PCR of 72% and (4) adequate capitalization with tier-I ratio of
~14% for the next growth phase. Loan growth is the key to the earnings given other
operating parameters in place now. We expect disbursement to exceed repayment
driving the loan CAGR of ~19% over FY10-13.
Structural improvement in margins: As of 3QFY11, ICICI Bank had domestic
margins of 3% and international margins of 85bp. Despite the increased share of
CASA ratio, margins were largely stable over FY08-11, as growth was driven by low
yielding corporate and home loans and slippages were higher. Over FY11-13, we
expect NIM to improve as corporate book likely to reprice, CASA ratio is expected to
be 40%+ and asset quality to remain healthy. Even international margins are expected
to improve with the fixed liability reprising. We model in margin improvement of 10bp
each for FY12 and FY13. Near term NIM is expected to be stable/marginal decline
with a higher share of RIDF bonds and priority sector loans.
Decline in credit costs to boost return ratios: ICICI Bank's moderate loan growth
over the past two years, seasoning of the retail loans and increased proportion of
secured products, will result in lower incremental slippage, and credit cost. We believe
credit cost has peaked in 1HFY11 (0.93% in 3QFY11 from 1.55% 1HFY11 and 2.2%
in FY10) and we model in a decline in credit costs to ~0.9% in FY12 and FY13,
leading to improved RoA.
Sharp improvement in fundamental; valuation attractive: Structural improvement
on the liability side increases our comfort with improved ALM, fall in proportion of bulk
deposits and a strong CASA ratio. Aggressive branch expansion (in FY10) and takeover
of BoR will help ICICI Bank to keep its CASA share high and improve retail term
deposits growth and fee income growth. ICICI bank is our top pick among private
banks considering (a) expected improvement in core performance (led by loan growth),
(b) strong capitalization among large private banks and (c) value unlocking potential
from other business ventures. We expect core RoE to improve to 14% by FY12 and
15% in FY13. Maintain Buy with an SOTP based target price of Rs1,385
3QFY11 highlights
Key positives
Loan growth picked up and grew 6.5% sequentially
and 15%+ YoY. On a YTD basis loans grew 14%,
driven by higher disbursals in the corporate segment.
Corporate loans grew 17% QoQ and 65% YoY.
3QFY11 provisions declined 28% QoQ to Rs4.6b,
led by stable asset quality. PCR increased to ~72%
v/s 69% a quarter earlier. Credit cost during the
quarter was ~0.9% of loans v/s 1.4% a quarter earlier
and 1.55% in 1HFY11.
CASA grew 23% YoY (declined 2% QoQ) to Rs962b.
On an average daily basis, CASA ratio was 40.3%.
3QFY11 RoA was ~1.5% led by a decline in credit
costs.
Key negatives
ICICI Bank's NIMs were sequentially stable at 2.6%
(unlike improvement for peers) led by a higher CD
ratio. Higher proportion of RIDF bonds (to full priority
sector targets) led to a drag on margins.
Fee income growth lagged loan growth. Fees grew
2% QoQ and 14% YoY to Rs16.3b.
Other highlights
Restructured assets remained stable QoQ at
Rs25.6b (~1% of the customer assets).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Operating parameters in place; Growth is the key
Structural improvement in RoA to 1.5%; Top pick, Buy with the target price of Rs1,385
After a period of consolidation over the past two years, focus has shifted to growth, with
corporate, autos and home loans being key drivers. Over FY11-13, domestic business
growth is expected to be above the industry growth with CASA ratio expected to remain
at 40%+. Stable/improving margins, control over cost-to-income ratio and a fall in credit
costs will ensure RoA of ~1.5% over FY11-13. Strong CAR of 20% with tier-I ratio of ~14%
will ensure dilution-free growth.
Execution of 4 Cs strategy commendable: ICICI Bank's execution on 4Cs strategy
has been commendable, with (1) average CASA ratio improving to ~40% (from 22% in
FY07), (2) cost-to-core income declining to ~42% from 58% in FY07, (3) NNPA declining
to 1.2% with improved PCR of 72% and (4) adequate capitalization with tier-I ratio of
~14% for the next growth phase. Loan growth is the key to the earnings given other
operating parameters in place now. We expect disbursement to exceed repayment
driving the loan CAGR of ~19% over FY10-13.
Structural improvement in margins: As of 3QFY11, ICICI Bank had domestic
margins of 3% and international margins of 85bp. Despite the increased share of
CASA ratio, margins were largely stable over FY08-11, as growth was driven by low
yielding corporate and home loans and slippages were higher. Over FY11-13, we
expect NIM to improve as corporate book likely to reprice, CASA ratio is expected to
be 40%+ and asset quality to remain healthy. Even international margins are expected
to improve with the fixed liability reprising. We model in margin improvement of 10bp
each for FY12 and FY13. Near term NIM is expected to be stable/marginal decline
with a higher share of RIDF bonds and priority sector loans.
Decline in credit costs to boost return ratios: ICICI Bank's moderate loan growth
over the past two years, seasoning of the retail loans and increased proportion of
secured products, will result in lower incremental slippage, and credit cost. We believe
credit cost has peaked in 1HFY11 (0.93% in 3QFY11 from 1.55% 1HFY11 and 2.2%
in FY10) and we model in a decline in credit costs to ~0.9% in FY12 and FY13,
leading to improved RoA.
Sharp improvement in fundamental; valuation attractive: Structural improvement
on the liability side increases our comfort with improved ALM, fall in proportion of bulk
deposits and a strong CASA ratio. Aggressive branch expansion (in FY10) and takeover
of BoR will help ICICI Bank to keep its CASA share high and improve retail term
deposits growth and fee income growth. ICICI bank is our top pick among private
banks considering (a) expected improvement in core performance (led by loan growth),
(b) strong capitalization among large private banks and (c) value unlocking potential
from other business ventures. We expect core RoE to improve to 14% by FY12 and
15% in FY13. Maintain Buy with an SOTP based target price of Rs1,385
3QFY11 highlights
Key positives
Loan growth picked up and grew 6.5% sequentially
and 15%+ YoY. On a YTD basis loans grew 14%,
driven by higher disbursals in the corporate segment.
Corporate loans grew 17% QoQ and 65% YoY.
3QFY11 provisions declined 28% QoQ to Rs4.6b,
led by stable asset quality. PCR increased to ~72%
v/s 69% a quarter earlier. Credit cost during the
quarter was ~0.9% of loans v/s 1.4% a quarter earlier
and 1.55% in 1HFY11.
CASA grew 23% YoY (declined 2% QoQ) to Rs962b.
On an average daily basis, CASA ratio was 40.3%.
3QFY11 RoA was ~1.5% led by a decline in credit
costs.
Key negatives
ICICI Bank's NIMs were sequentially stable at 2.6%
(unlike improvement for peers) led by a higher CD
ratio. Higher proportion of RIDF bonds (to full priority
sector targets) led to a drag on margins.
Fee income growth lagged loan growth. Fees grew
2% QoQ and 14% YoY to Rs16.3b.
Other highlights
Restructured assets remained stable QoQ at
Rs25.6b (~1% of the customer assets).
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