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ICICI Bank
4Q earnings in-line; Margins
surprise; Reiterate Buy and PO
4Q11: Earnings in-line, but margin rise was a surprise
4QFY11 earnings of Rs14.5bn (up +44% yoy) were in-line with estimates, but
driven by a better than expected rebound in topline (up +23% yoy), as margins
expanded (up 10bps yoy and qoq) to 2.7% due to re-pricing of domestic loans.
Loan growth was strong at +19.4% yoy (5% qoq) led by corporate and overseas.
Provisions were +16% lower than estimated, as asset quality held-up and no new
net NPL level accretion. CASA rose to +45.1% (from 44.2% in 3Q and 41.7% in
4QFY10) with the bank successfully leveraging its expanding distribution. Core
fees were up 18% yoy, largely driven by corporate and international fees.
ROA set to rise to +1.6% by FY12e; core ROE to +15.0%
While we have tweaked (<3-4%) our FY12-13e earnings to factor in lower
treasury gains, we believe the quality of earnings is likely to be much better. We
estimate earnings growth of +35/25% in FY12/13 driven by +19-20% topline
growth led by +20bps margins expansion (FY11-13), as loans re-price and
margins in overseas biz. increase. We also expect asset quality improvement
sustaining through FY13. Core ROA estimated to rise to +1.6-1.7% in FY12-13 vs.
1.3% in FY11).
Reiterate Buy and maintain PO
We reiterate our Buy and PO, as we expect 1) strong earnings trajectory of FY11
to continue in FY12/13 (+35/25%, resp.) and 2) RoAs to rise to +1.6-1.7% in
FY12/13 and RoEs to +15% in FY12 and further to +17.5% in FY13. Furthermore,
IBank remains well placed on credit costs owing to its seasoned book. Hence, we
believe bank trading at +2.0x FY12e (bk. biz.) can trade up to +2.5-2.6x FY12e
book. Add to this subs (non-bank) value of Rs237/shr, we get our PO of Rs1400.
4Q11: Earnings in-line, but margins surprise
4QFY11 earnings of Rs14.5bn (up +44% yoy) were in-line with estimates, but
driven by a rebound in topline (up +23% yoy), as margins expanded (up 10bps
yoy and qoq) to 2.7% due to rise in domestic margins. Loan growth was +19.4%
yoy. Also, provisions were +16% lower than estimated, as asset quality held-up.
Topline supported by +19% loan growth and margins rising 10bps qoq and yoy
to 2.7%. CASA rose to +45.1% (from 44.2% in 3Q and 41.7% in 4QFY10) with
the bank successfully leveraging its expanding distribution. Margins in domestic
business rose 10bps to 310bps, but international loan book, which is +25% of its
loan book and has seen strong growth at year-end (+22% yoy), has margins of
~85bps. We view this positively, as today, ICICI Bk is earning a margin of +125-
140bps on its international book.
Further, loans grew by ~5% qoq driven by corporate and retail lending. Core
fees were up 18% yoy, largely driven by corporate and international fees, as
growth in retail fees (credit cards and 3rd party distribution) remained challenged.
Treasury saw an Rs1.9bn loss due to losses on security receipts and equity
book, partly offset by gains on G-secs. Opex was up 21% yoy and was largely inline
with estimates.
Asset quality was also very comfortable with no NPL accretion (at bank level).
Gross NPLs flat qoq and net NPLs at 0.9%, down 16% qoq in absolute terms.
Close to 65% of gross NPLs continue to be from retail. Provision coverage is at
~76%. No new fresh restructuring in 4Q, but upgrades / recoveries / closure,
resulted in restructuring book down to Rs20bn vs. Rs25bn in 3Q.
The performance of international subs was muted (b/s decline) owing to bank
taking a conscious decision to lower its lending to these markets, as the local
regulators require local lending vs. ICICI Bk’s strategy of largely lending to Indian
corporates.
International Subsidiaries
UK subsidiary
UK sub reported a net profit of US$36.6mn in FY11 vs. (US$37mn in FY10).
The CAR stands at +23%. Net MTM write-back of US$23.7mn in reserves in
FY11.
Total Assets of UK subsidiary were at US$6.4bn (US$7bn in Dec ‘10),
deposits were ~65% of total liabilities, 50% of which are term deposits for
period ranging from 12-18 months. Proportion of retail term deposits in total
deposits at 77%.
Of total assets of US$6.4bn, 56% are loans and advances to customers
(80% Indian corporate); 4% are India-linked investments; 21% is cash and
liquid investments; <2% is asset-backed investments and 11% is bonds of
financial inst. along with ~6% of other assets.
Canada Subsidiary
Canada subsidiary asset book stands at CAD$4.5bn (CAD$4.7bn in Dec
’10), with deposits at 74% (58% term deposits). Of the assets, 66% are loans
(80% to Indian corporate), 12% in cash and liquid securities, 7% federally
insured mortgages, <2% India linked investments, <2% asset-backed
securities, and the balance other assets.
Net profit of Canada Subs stands at CAD$32.4mn in FY11 (CAD$35.4mn in
FY10). Canada arm continues to be overcapitalized with CAR at +26%.
Eurasia Subsidiary
Total assets of US$324mn (US$367mn in Dec ’10) of which 55% (48% in
Dec ‘10) are loans, 31% in cash and liquid securities, 9% promissory notes,
2% corporate bonds and rest are other assets. Capital adequacy of 34% as
on FY11.
Other subs. - (Insurance, AMC etc)
Life insurance biz. recorded a statutory profit of Rs8.1bn in FY11 vs. a loss
of Rs1bn in 9MFY10, including surplus from non-participating policyholder’s
funds. I-Pru’s APE (new biz.) has declined by ~3% in FY11. NBP margins for
FY11 declined by ~110bps to 17.9% with 4QFY11 margins declining sharply
to 15.3% (vs ~19% margins for the 9MFY11). Expense ratio declined by
220bps to 17.3% in FY11 from 19.5% in FY10. The AUM grew by 18% to
+680bn at FY11. While the share of single premium has increased in FY11,
the company is clearly looking to channelize its strategy towards regular
premium products from FY12.
General insurance reported a loss of Rs0.8bn vs. a profit of ~Rs2bn in
9MFY11 owing to a change in IRDA (regulator) stance of providing for motor
pool losses at a provisional ratio of 153% (from FY08 to FY11) compared to
earlier loss ratio of Rs122-127%. ICICI General being a leader (~10%)
market share had to proportionately take a loss of Rs2.7bn on this regulatory
change. However, positively, the regulator has also increased motor pool
premiums by +68% from April 25th, which, in our view, should negate the
above losses going ahead. Overall, premium for the general insurance
business have increased by 29% yoy.
The Asset management biz. after regulatory changes has seen lower profits
of Rs0.72bn in FY11 vs. Rs1.28bn in FY10 on a/c of higher marketing
expenses.
ICICI Securities and PD’s profit after tax for FY11 was Rs1.66bn vs. Rs2.05
in FY10.
Housing finance total assets at Rs87bn are down from 94bn in 3Q and
Rs101bn in 2QFY11. ~96% are mortgage loans funded by mix of borrowings
(62%) and deposits (22%). CAR at +22% and net NPLs at 1.3%.
Tweak earnings by ~3-4%; growth at +35/25%
We have marginally tweaked earnings estimates (~3-4%) to factor in marginally
lower treasury gains. However, the quality of earnings is likely to be much better
supported by the topline, driven by rising margins and sustained asset quality
improvement. We estimate earnings to grow by +35/25% in FY12/13e on back of
earnings growth of ~26% in FY11.
Key assumptions driving operating earnings
We discuss below the key drivers for our future earnings estimates and overall
outlook.
Loan growth at +20% in FY12e on domestic capex /infra; mortgage; auto
We now estimate +20-21% loan growth partly led by retail growth (mortgage and
vehicle). Further, we continue to see the domestic corporate loan book expanding
at more rapid pace of +30-35% in FY12e, led by infrastructure and project
finance. The overseas loan book is likely to see a +15% yoy growth.
Margins to expand by ~20bps through FY11-13e; avg. CASA at +42-43%
While 1Q margins could see a somewhat pressure owing to agri. book build-up,
through FY12 we expect margins to see a sustained rise supported by overall
pick up in lending, per se. Margins should also expand in FY12 for ICICI Bank as
1) loans re-price with a lag as ICICI BK has re-set clauses at set dates (spread
over the year) vs. most govt. banks, which where a change in lending rate
triggers an immediate change in borrowing cost for the borrower; 2) moreover,
with almost 70% of the book floating / re-pricing in FY12 and rise in share of retail
deposits (65% of total) vs. wholesale nature earlier should see margins
expanding and; 3) higher incremental international spreads (+125-140bps vs.
book spreads of 85bps now) will also likely trickle down in margins.
Further, the bank should also see its savings deposit franchise expanding as it
leverages its expanded distribution. The expanded branch distribution would help
the bank raise the level of savings deposits that is likely to grow by +20% through
FY12/13. Margins forecast to expand to ~2.7% in FY12 and +2.8% in FY13 from
2.6% in FY11.
Fee revenues to get fillip with pick up in lending; branch expansion
Fee revenues should potentially see a much stronger rebound in FY12 (leaving
room for upside) as loan growth picks up and we see pick up in equity linked
products (mutual funds and insurance).
Fee revenues should also benefit from the banks’ expanding branch distribution.
The bank has increased its branch network by a third between Jun’09 v/s Mar’11.
Total branches at +2500 in Mar’11. This should help sustain a high level of
savings deposits and customer acquisition. Expanding customer base should
positively impact both the saving deposit franchise and also retail fees and asset
cross sell.
Maintain SOTP at Rs237/shr.
ICICI Pru Life’s growth to date (APE) has been +25%. Moreover, NBP margins
have also held-up at 17.9% (down from 19% in FY10), although down to 15.3% in
4Q. We remain positive on ICICI Bank’s life insurance biz. prospects as we
believe players like SBI are in a very strong position on economies of scale,
already reporting profits, and adopting a bancassurance model, which will give
itself an edge vis-à-vis other players in this uncertain scenario. We believe life
business can command 1x EV (FY11e) and 7x NBAP multiples.
Core RoE to expand to ~15.0% by FY12e, +17.5% in FY13e
ICICI Bank’s reported RoEs is forecast to rise to +12.0% by FY12. But the RoE is
depressed owing to capital infusion of almost +US$2.5bn in its various ventures
on which earn minimal today, creating a drag on its ROE. The adjusted core
ROE (if we just look at the profit made from the capital deployed in the banking
entity) is likely to rise to +15.0% by FY12e and further to +17.5% in FY13e
Stock can trade +2.5-2.6x FY12e banking book
The stock is trading at +2.0-2.1x FY12e “core adj.” book (banking book) which is
after deducting value of the entire NPL’s and investments in its non-bank subs.
This, in our view, is the closest comparison to other private sector banks such as
HDFC Bank that trades at ~3.4x book with ~20% RoE’s. While ICICI Bank may
continue to trade at some discount as it needs to “deliver” on some of the key
variables, the results have helped reinforce our views that the bank can deliver
across these variables.
We reiterate our Buy (maintain PO), as we expect 1) strong earnings trajectory of
+35/25% in FY12/13e to continue and 2) RoAs to rise to +1.6-1.7% in FY12/13e
and RoEs rising to +15% in FY12e and further to +17.5% in FY13e. Hence, we
believe the bank trading at +2.0x FY12e (bk. biz.) can trade up to +2.5-2.6x
FY12e book. Add to this subs (non-bank) value of Rs237/shr, we get out PO of
Rs1400. Moreover, the stock trades at only 14.5x FY12e earnings with earnings
growth estimated at +35/25% in FY12/13.
Price objective basis & risk
ICICI Bank (ICIJF / IBN)
We set our PO at Rs1400. ICICI Bank appears amongst the better positioned
banks to both capitalize on growth and best positoned in terms of asset quality.
We believe the bank trading at 2.0-2.1x FY12e (bk. biz.) can trade up to +2.5-
2.6x, which is a premium to theoretical multiples, led by earnings trajectory of
+30% (topline) and a sharp unwinding of credit costs, especially where most
banks asset quality continues to see-saw. Add to this subs (non-bank) value of
Rs237/shr, we get out PO of Rs1400. Risks are sharp rise in interest rates could
hurt margins (35% of total deosits wholesale for ICICI Bank) and slowdown in
macro growth could lead to lower volume growth and earnings trajectory for
FY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank
4Q earnings in-line; Margins
surprise; Reiterate Buy and PO
4Q11: Earnings in-line, but margin rise was a surprise
4QFY11 earnings of Rs14.5bn (up +44% yoy) were in-line with estimates, but
driven by a better than expected rebound in topline (up +23% yoy), as margins
expanded (up 10bps yoy and qoq) to 2.7% due to re-pricing of domestic loans.
Loan growth was strong at +19.4% yoy (5% qoq) led by corporate and overseas.
Provisions were +16% lower than estimated, as asset quality held-up and no new
net NPL level accretion. CASA rose to +45.1% (from 44.2% in 3Q and 41.7% in
4QFY10) with the bank successfully leveraging its expanding distribution. Core
fees were up 18% yoy, largely driven by corporate and international fees.
ROA set to rise to +1.6% by FY12e; core ROE to +15.0%
While we have tweaked (<3-4%) our FY12-13e earnings to factor in lower
treasury gains, we believe the quality of earnings is likely to be much better. We
estimate earnings growth of +35/25% in FY12/13 driven by +19-20% topline
growth led by +20bps margins expansion (FY11-13), as loans re-price and
margins in overseas biz. increase. We also expect asset quality improvement
sustaining through FY13. Core ROA estimated to rise to +1.6-1.7% in FY12-13 vs.
1.3% in FY11).
Reiterate Buy and maintain PO
We reiterate our Buy and PO, as we expect 1) strong earnings trajectory of FY11
to continue in FY12/13 (+35/25%, resp.) and 2) RoAs to rise to +1.6-1.7% in
FY12/13 and RoEs to +15% in FY12 and further to +17.5% in FY13. Furthermore,
IBank remains well placed on credit costs owing to its seasoned book. Hence, we
believe bank trading at +2.0x FY12e (bk. biz.) can trade up to +2.5-2.6x FY12e
book. Add to this subs (non-bank) value of Rs237/shr, we get our PO of Rs1400.
4Q11: Earnings in-line, but margins surprise
4QFY11 earnings of Rs14.5bn (up +44% yoy) were in-line with estimates, but
driven by a rebound in topline (up +23% yoy), as margins expanded (up 10bps
yoy and qoq) to 2.7% due to rise in domestic margins. Loan growth was +19.4%
yoy. Also, provisions were +16% lower than estimated, as asset quality held-up.
Topline supported by +19% loan growth and margins rising 10bps qoq and yoy
to 2.7%. CASA rose to +45.1% (from 44.2% in 3Q and 41.7% in 4QFY10) with
the bank successfully leveraging its expanding distribution. Margins in domestic
business rose 10bps to 310bps, but international loan book, which is +25% of its
loan book and has seen strong growth at year-end (+22% yoy), has margins of
~85bps. We view this positively, as today, ICICI Bk is earning a margin of +125-
140bps on its international book.
Further, loans grew by ~5% qoq driven by corporate and retail lending. Core
fees were up 18% yoy, largely driven by corporate and international fees, as
growth in retail fees (credit cards and 3rd party distribution) remained challenged.
Treasury saw an Rs1.9bn loss due to losses on security receipts and equity
book, partly offset by gains on G-secs. Opex was up 21% yoy and was largely inline
with estimates.
Asset quality was also very comfortable with no NPL accretion (at bank level).
Gross NPLs flat qoq and net NPLs at 0.9%, down 16% qoq in absolute terms.
Close to 65% of gross NPLs continue to be from retail. Provision coverage is at
~76%. No new fresh restructuring in 4Q, but upgrades / recoveries / closure,
resulted in restructuring book down to Rs20bn vs. Rs25bn in 3Q.
The performance of international subs was muted (b/s decline) owing to bank
taking a conscious decision to lower its lending to these markets, as the local
regulators require local lending vs. ICICI Bk’s strategy of largely lending to Indian
corporates.
International Subsidiaries
UK subsidiary
UK sub reported a net profit of US$36.6mn in FY11 vs. (US$37mn in FY10).
The CAR stands at +23%. Net MTM write-back of US$23.7mn in reserves in
FY11.
Total Assets of UK subsidiary were at US$6.4bn (US$7bn in Dec ‘10),
deposits were ~65% of total liabilities, 50% of which are term deposits for
period ranging from 12-18 months. Proportion of retail term deposits in total
deposits at 77%.
Of total assets of US$6.4bn, 56% are loans and advances to customers
(80% Indian corporate); 4% are India-linked investments; 21% is cash and
liquid investments; <2% is asset-backed investments and 11% is bonds of
financial inst. along with ~6% of other assets.
Canada Subsidiary
Canada subsidiary asset book stands at CAD$4.5bn (CAD$4.7bn in Dec
’10), with deposits at 74% (58% term deposits). Of the assets, 66% are loans
(80% to Indian corporate), 12% in cash and liquid securities, 7% federally
insured mortgages, <2% India linked investments, <2% asset-backed
securities, and the balance other assets.
Net profit of Canada Subs stands at CAD$32.4mn in FY11 (CAD$35.4mn in
FY10). Canada arm continues to be overcapitalized with CAR at +26%.
Eurasia Subsidiary
Total assets of US$324mn (US$367mn in Dec ’10) of which 55% (48% in
Dec ‘10) are loans, 31% in cash and liquid securities, 9% promissory notes,
2% corporate bonds and rest are other assets. Capital adequacy of 34% as
on FY11.
Other subs. - (Insurance, AMC etc)
Life insurance biz. recorded a statutory profit of Rs8.1bn in FY11 vs. a loss
of Rs1bn in 9MFY10, including surplus from non-participating policyholder’s
funds. I-Pru’s APE (new biz.) has declined by ~3% in FY11. NBP margins for
FY11 declined by ~110bps to 17.9% with 4QFY11 margins declining sharply
to 15.3% (vs ~19% margins for the 9MFY11). Expense ratio declined by
220bps to 17.3% in FY11 from 19.5% in FY10. The AUM grew by 18% to
+680bn at FY11. While the share of single premium has increased in FY11,
the company is clearly looking to channelize its strategy towards regular
premium products from FY12.
General insurance reported a loss of Rs0.8bn vs. a profit of ~Rs2bn in
9MFY11 owing to a change in IRDA (regulator) stance of providing for motor
pool losses at a provisional ratio of 153% (from FY08 to FY11) compared to
earlier loss ratio of Rs122-127%. ICICI General being a leader (~10%)
market share had to proportionately take a loss of Rs2.7bn on this regulatory
change. However, positively, the regulator has also increased motor pool
premiums by +68% from April 25th, which, in our view, should negate the
above losses going ahead. Overall, premium for the general insurance
business have increased by 29% yoy.
The Asset management biz. after regulatory changes has seen lower profits
of Rs0.72bn in FY11 vs. Rs1.28bn in FY10 on a/c of higher marketing
expenses.
ICICI Securities and PD’s profit after tax for FY11 was Rs1.66bn vs. Rs2.05
in FY10.
Housing finance total assets at Rs87bn are down from 94bn in 3Q and
Rs101bn in 2QFY11. ~96% are mortgage loans funded by mix of borrowings
(62%) and deposits (22%). CAR at +22% and net NPLs at 1.3%.
Tweak earnings by ~3-4%; growth at +35/25%
We have marginally tweaked earnings estimates (~3-4%) to factor in marginally
lower treasury gains. However, the quality of earnings is likely to be much better
supported by the topline, driven by rising margins and sustained asset quality
improvement. We estimate earnings to grow by +35/25% in FY12/13e on back of
earnings growth of ~26% in FY11.
Key assumptions driving operating earnings
We discuss below the key drivers for our future earnings estimates and overall
outlook.
Loan growth at +20% in FY12e on domestic capex /infra; mortgage; auto
We now estimate +20-21% loan growth partly led by retail growth (mortgage and
vehicle). Further, we continue to see the domestic corporate loan book expanding
at more rapid pace of +30-35% in FY12e, led by infrastructure and project
finance. The overseas loan book is likely to see a +15% yoy growth.
Margins to expand by ~20bps through FY11-13e; avg. CASA at +42-43%
While 1Q margins could see a somewhat pressure owing to agri. book build-up,
through FY12 we expect margins to see a sustained rise supported by overall
pick up in lending, per se. Margins should also expand in FY12 for ICICI Bank as
1) loans re-price with a lag as ICICI BK has re-set clauses at set dates (spread
over the year) vs. most govt. banks, which where a change in lending rate
triggers an immediate change in borrowing cost for the borrower; 2) moreover,
with almost 70% of the book floating / re-pricing in FY12 and rise in share of retail
deposits (65% of total) vs. wholesale nature earlier should see margins
expanding and; 3) higher incremental international spreads (+125-140bps vs.
book spreads of 85bps now) will also likely trickle down in margins.
Further, the bank should also see its savings deposit franchise expanding as it
leverages its expanded distribution. The expanded branch distribution would help
the bank raise the level of savings deposits that is likely to grow by +20% through
FY12/13. Margins forecast to expand to ~2.7% in FY12 and +2.8% in FY13 from
2.6% in FY11.
Fee revenues to get fillip with pick up in lending; branch expansion
Fee revenues should potentially see a much stronger rebound in FY12 (leaving
room for upside) as loan growth picks up and we see pick up in equity linked
products (mutual funds and insurance).
Fee revenues should also benefit from the banks’ expanding branch distribution.
The bank has increased its branch network by a third between Jun’09 v/s Mar’11.
Total branches at +2500 in Mar’11. This should help sustain a high level of
savings deposits and customer acquisition. Expanding customer base should
positively impact both the saving deposit franchise and also retail fees and asset
cross sell.
Maintain SOTP at Rs237/shr.
ICICI Pru Life’s growth to date (APE) has been +25%. Moreover, NBP margins
have also held-up at 17.9% (down from 19% in FY10), although down to 15.3% in
4Q. We remain positive on ICICI Bank’s life insurance biz. prospects as we
believe players like SBI are in a very strong position on economies of scale,
already reporting profits, and adopting a bancassurance model, which will give
itself an edge vis-à-vis other players in this uncertain scenario. We believe life
business can command 1x EV (FY11e) and 7x NBAP multiples.
Core RoE to expand to ~15.0% by FY12e, +17.5% in FY13e
ICICI Bank’s reported RoEs is forecast to rise to +12.0% by FY12. But the RoE is
depressed owing to capital infusion of almost +US$2.5bn in its various ventures
on which earn minimal today, creating a drag on its ROE. The adjusted core
ROE (if we just look at the profit made from the capital deployed in the banking
entity) is likely to rise to +15.0% by FY12e and further to +17.5% in FY13e
Stock can trade +2.5-2.6x FY12e banking book
The stock is trading at +2.0-2.1x FY12e “core adj.” book (banking book) which is
after deducting value of the entire NPL’s and investments in its non-bank subs.
This, in our view, is the closest comparison to other private sector banks such as
HDFC Bank that trades at ~3.4x book with ~20% RoE’s. While ICICI Bank may
continue to trade at some discount as it needs to “deliver” on some of the key
variables, the results have helped reinforce our views that the bank can deliver
across these variables.
We reiterate our Buy (maintain PO), as we expect 1) strong earnings trajectory of
+35/25% in FY12/13e to continue and 2) RoAs to rise to +1.6-1.7% in FY12/13e
and RoEs rising to +15% in FY12e and further to +17.5% in FY13e. Hence, we
believe the bank trading at +2.0x FY12e (bk. biz.) can trade up to +2.5-2.6x
FY12e book. Add to this subs (non-bank) value of Rs237/shr, we get out PO of
Rs1400. Moreover, the stock trades at only 14.5x FY12e earnings with earnings
growth estimated at +35/25% in FY12/13.
Price objective basis & risk
ICICI Bank (ICIJF / IBN)
We set our PO at Rs1400. ICICI Bank appears amongst the better positioned
banks to both capitalize on growth and best positoned in terms of asset quality.
We believe the bank trading at 2.0-2.1x FY12e (bk. biz.) can trade up to +2.5-
2.6x, which is a premium to theoretical multiples, led by earnings trajectory of
+30% (topline) and a sharp unwinding of credit costs, especially where most
banks asset quality continues to see-saw. Add to this subs (non-bank) value of
Rs237/shr, we get out PO of Rs1400. Risks are sharp rise in interest rates could
hurt margins (35% of total deosits wholesale for ICICI Bank) and slowdown in
macro growth could lead to lower volume growth and earnings trajectory for
FY12.
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