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ICICI Bank
Overweight
ICBK.BO, ICICIBC IN
4Q11: Earnings momentum sustains
• ICICI reported strong 4Q numbers – PAT at Rs14.5bn was 3%
above JPMe. Surprises on margins and credit costs were the key drivers,
offset by weak treasury. We raise FY12E/FY13E EPS by 5/8%, and our
PT by 6%. The stock stays OW and is our top pick among Indian
financials.
• ICICI ticked the right boxes in 4Q – Margins stayed resilient despite
funding cost pressures, credit costs continue to improve and growth is
slowly returning. The bank is delivering on key metrics of asset and
liability quality, and is slowly finding its feet in the market after a period
of consolidation.
• The EPS revision cycle is on its last legs, led primarily by margins and
credit costs. We are now forecasting ROAs to reach 1.7% by FY14,
given the strong momentum in profitability metrics. We think that there
is probably little upside from current levels – even our current upgraded
forecasts are now a little vulnerable to cycles, especially on credit costs.
• 4Q11- Key highlights: (1) Overall loan growth was strong at 19.4% y/y
growth with corporate including international book driving growth. (2)
Margins expanded 10bps q/q to 2.7% aided by non-recurring interest
savings on premature withdrawals. (3) Asset quality momentum
continued with near zero slippages and credit costs at ~70bps (in spite of
400bps increase in PCR).
• Maintain Overweight with a PT of Rs1300/share: We now value the
core bank (using Gordon growth) at a PB of 2.5 FY13E (on notionally
utilized capital) and raise our SOP PT by 6% to Rs Rs1300/share. The
key risks are rising credit spreads for Indian paper (which would put
pressure on the international loan book) and cyclical upturns in credit
costs.
Loan growth momentum picking up:
• The focus on growth in FY11 was corporate – that segment grew 44% y/y.
This included the international book, which actually outgrew the domestic
book with growth at ~22%.
• A key data point was the growth in the power book from Rs56bn to Rs98bn
– an area that we are concerned about. We continue to believe, however,
that ICICI is better off as most of its growth was from 12-18 month-old
sanctions, where the quality was relatively better off.
• The management did indicate that the retail book will now start to expand
again.
• In FY12, management is targeting ~20% loan growth, with the domestic
book outgrowing international loans.
Margins
• Margins were helped by non-recurring interest savings on premature
withdrawals, which cushioned rising deposit rates. Despite significant rate
hikes, some categories of loans (mortgages, term loans) reprice discretely,
so the bank does see some asset repricing cushion against rising deposit
costs. Investment repricing should also help.
• Spreads on the international book are expected to widen from ~80bp to
1.25%. This is assuming that credit spreads for Indian paper do not rise
significantly (50-75bp). Otherwise, both margins and growth in the
international book would be under pressure.
• Overall, management sees margins stable y/y, with some intra-year
volatility. The negative 1Q seasonal impact is expected to be cushioned by
the base rate, which provided a floor to low-yield agriculture loans.
Details on subsidiary performance
• Stat profits for the lifeco expanded 3.1x to Rs 8.1bn. NBAP margins for the
year ended at 17.9%, down 110bp yoy. 4Q margins stood at 15.3% -
management targets a turnaround from these levels. We are more skeptical
and factor in 14%, not least because of higher tax incidence from FY13.
• The general insurance company was hit by an Rs 2bn one-time adjustment
in the motor pool liabilities – this is regulated by the IRDA. This resulted in
losses and a recap of ~Rs2bn. The third-party insurance for CVs has now
been repriced so there should be no further bleeding on this score. We value
the general insurance company at cost, and it contributes ~1% to SOP – we
do not see this as a major worry.
• The international subsidiaries continue to remain static given ICICI’s
inability to finance Indian credit out of those liabilities. There are no major
profit shocks from either.
Maintain Overweight, increase PT to Rs1300/share
We raise our FY12E/FY13E EPS by 5/8% on lower credit costs and higher margins
and increase our PT by 6% to Rs1300/share (Rs1225/share earlier). We now value
the core bank (using Gordon growth) at a PB of 2.5x FY13E (on notionally utilized
capital) and raise our SOP PT by 6% to Rs Rs1300/share. The key risks are rising
credit spreads for Indian paper (which would put pressure on the international loan
book) and cyclical upturns in credit costs.
ICICI Bank: PT of Rs1300/share
Normalized ROE
NII/assets 2.5%
Non Interest Income/Assets 2.0%
Opex/Assets 1.9%
LLP/Loans -1.0%
Pre tax ROA 2.2%
Normalized ROA 1.6%
Normalized ROE 22.4%
Cost of Equity 14.1%
ROE 22.4%
Terminal growth 5.0%
2dn stage growth (FY14-19) 24.0%
Mar-12 PT 1300
Subsidiary valuation 208
Implied P/B on notional book 2.54
Source: J.P.Morgan estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank
Overweight
ICBK.BO, ICICIBC IN
4Q11: Earnings momentum sustains
• ICICI reported strong 4Q numbers – PAT at Rs14.5bn was 3%
above JPMe. Surprises on margins and credit costs were the key drivers,
offset by weak treasury. We raise FY12E/FY13E EPS by 5/8%, and our
PT by 6%. The stock stays OW and is our top pick among Indian
financials.
• ICICI ticked the right boxes in 4Q – Margins stayed resilient despite
funding cost pressures, credit costs continue to improve and growth is
slowly returning. The bank is delivering on key metrics of asset and
liability quality, and is slowly finding its feet in the market after a period
of consolidation.
• The EPS revision cycle is on its last legs, led primarily by margins and
credit costs. We are now forecasting ROAs to reach 1.7% by FY14,
given the strong momentum in profitability metrics. We think that there
is probably little upside from current levels – even our current upgraded
forecasts are now a little vulnerable to cycles, especially on credit costs.
• 4Q11- Key highlights: (1) Overall loan growth was strong at 19.4% y/y
growth with corporate including international book driving growth. (2)
Margins expanded 10bps q/q to 2.7% aided by non-recurring interest
savings on premature withdrawals. (3) Asset quality momentum
continued with near zero slippages and credit costs at ~70bps (in spite of
400bps increase in PCR).
• Maintain Overweight with a PT of Rs1300/share: We now value the
core bank (using Gordon growth) at a PB of 2.5 FY13E (on notionally
utilized capital) and raise our SOP PT by 6% to Rs Rs1300/share. The
key risks are rising credit spreads for Indian paper (which would put
pressure on the international loan book) and cyclical upturns in credit
costs.
Loan growth momentum picking up:
• The focus on growth in FY11 was corporate – that segment grew 44% y/y.
This included the international book, which actually outgrew the domestic
book with growth at ~22%.
• A key data point was the growth in the power book from Rs56bn to Rs98bn
– an area that we are concerned about. We continue to believe, however,
that ICICI is better off as most of its growth was from 12-18 month-old
sanctions, where the quality was relatively better off.
• The management did indicate that the retail book will now start to expand
again.
• In FY12, management is targeting ~20% loan growth, with the domestic
book outgrowing international loans.
Margins
• Margins were helped by non-recurring interest savings on premature
withdrawals, which cushioned rising deposit rates. Despite significant rate
hikes, some categories of loans (mortgages, term loans) reprice discretely,
so the bank does see some asset repricing cushion against rising deposit
costs. Investment repricing should also help.
• Spreads on the international book are expected to widen from ~80bp to
1.25%. This is assuming that credit spreads for Indian paper do not rise
significantly (50-75bp). Otherwise, both margins and growth in the
international book would be under pressure.
• Overall, management sees margins stable y/y, with some intra-year
volatility. The negative 1Q seasonal impact is expected to be cushioned by
the base rate, which provided a floor to low-yield agriculture loans.
Details on subsidiary performance
• Stat profits for the lifeco expanded 3.1x to Rs 8.1bn. NBAP margins for the
year ended at 17.9%, down 110bp yoy. 4Q margins stood at 15.3% -
management targets a turnaround from these levels. We are more skeptical
and factor in 14%, not least because of higher tax incidence from FY13.
• The general insurance company was hit by an Rs 2bn one-time adjustment
in the motor pool liabilities – this is regulated by the IRDA. This resulted in
losses and a recap of ~Rs2bn. The third-party insurance for CVs has now
been repriced so there should be no further bleeding on this score. We value
the general insurance company at cost, and it contributes ~1% to SOP – we
do not see this as a major worry.
• The international subsidiaries continue to remain static given ICICI’s
inability to finance Indian credit out of those liabilities. There are no major
profit shocks from either.
Maintain Overweight, increase PT to Rs1300/share
We raise our FY12E/FY13E EPS by 5/8% on lower credit costs and higher margins
and increase our PT by 6% to Rs1300/share (Rs1225/share earlier). We now value
the core bank (using Gordon growth) at a PB of 2.5x FY13E (on notionally utilized
capital) and raise our SOP PT by 6% to Rs Rs1300/share. The key risks are rising
credit spreads for Indian paper (which would put pressure on the international loan
book) and cyclical upturns in credit costs.
ICICI Bank: PT of Rs1300/share
Normalized ROE
NII/assets 2.5%
Non Interest Income/Assets 2.0%
Opex/Assets 1.9%
LLP/Loans -1.0%
Pre tax ROA 2.2%
Normalized ROA 1.6%
Normalized ROE 22.4%
Cost of Equity 14.1%
ROE 22.4%
Terminal growth 5.0%
2dn stage growth (FY14-19) 24.0%
Mar-12 PT 1300
Subsidiary valuation 208
Implied P/B on notional book 2.54
Source: J.P.Morgan estimates.
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