ICICI Bank The elephant has started dancing : TP of Rs1,400.:: Macquarie Research

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ICICI Bank
The elephant has started dancing
Event
 Good quality results across the board: ICICI Bank reported net profit of
Rs16bn – 10% below our estimates due to lower treasury profits. However the
numbers did surprise us positively on margins, asset quality and loan growth.

Impact
 Growth is coming back: The bank has grown its loan book 19% YoY in
FY2011 driven by strong 40%+ growth in domestic advances and 22% growth
in advances of international branches. Excluding the BOR (unlisted) merger,
the advances growth for ICICI was closer to 16% for FY11. The guidance for
FY12 loan growth is 20% driven by 20% growth in corporate, SME, rural &
agri as well as international business done out of branches. Retail is also
expected to pick up.
 NIMs surprised positively: The 10bps QoQ expansion in NIMs to 2.7% was
a positive surprise though close to 6-7bps had come on the back of premature
breaking of term deposits (and consequently lower interest
expense/rates). The bank doesn’t expect NIM compression to be similar to the
levels seen usually in 1Q due to priority sector repricing as the base rate has
resulted in more rational pricing of priority sector loans (PSL). The
international business incrementally is being done at spreads of 150-200bps
and it also has close to $2bn of loan repricing in international business which
should help NIMs. Hence the company expects NIMs to be maintained at
FY11 levels of 2.6%. Management maintains that repricing on the asset will
be offset by higher cost of deposits (which has gone up 20bps QoQ) yet to
fully reflect and increased investments in RIDF bonds to meet PSL norms.
 Credit charges to be around 80bps to 100bps for FY12E: The credit costs
this quarter was closer to 70bps of loans and management expects credit
costs to stabilise around 80–100bps. We have factored in credit costs of
100bps for FY12E. Slippages this quarter were negligible and restructured
loans book has also come down sharply by 63% YoY. Upsides do exist to our
numbers. Management is very sanguine and asset quality and it believes that
even if rates go up by another 50–100bps, asset quality should be fine.
 Key disappointments: 1) New business margins in life insurance business
are coming down and now down to 15% in 4Q from a high of 19% observed
last year 2) The international subsidiaries (UK and Canada) are likely to see
continued decline in loan book. The excess capital there is going to sit quite
unproductively.
Earnings and target price revision
 No change. We are introducing FY14E numbers.
Price catalyst
 12-month price target: Rs1,400.00 based on a Sum of Parts methodology.
 Catalyst: Positive surprises on loan growth, NIMs and asset quality
Action and recommendation
 Maintain Outperform and reiterate ICICI as our top pick with TP of Rs1,400.