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ICICI Bank (ICICIBC)
OW: Reward > Risk
ICICI Bank is in the sweet spot where growth is accelerating
and costs are falling – as evidenced in 4Q 11 earnings today
Accordingly we raise our earnings estimates 11% and 15%
this year and next as ROE approaches 15% by FY13E
Reiterate OW rating; reduce target price to INR1,300 (from
INR1,350), implying a potential return of 18%
4QFY11 earnings surprised us positively by 13% and even though they were in line with
street estimates, the quality of earnings surprised positively. The stock ended up 1%,
outperforming the Bankex by 2%.
Key positives & surprises: While loan growth came in as expected, the 10bps increase in
margins to 2.7% surprised positively but is likely to correct slightly as deposit repricing
catches up to some extent. Fees surprised positively by 4%, particularly on the corporate
side as the domestic wholesale book displayed good growth traction. Core cost-income
ratio stayed steady at 43%. Thus, the continued improvement in asset quality led to lower
credit costs (73bps in 4Q11) ramping up profit growth to 44%.
Earnings outlook: With the Bank expected to grow its balance sheet 20% for the next
two years led by the domestic wholesale book, flattish margins and provisions, we
estimate profit growth of 31% and 24% y/y for FY12E and FY13E, respectively, with
ROA expanding to 1.5%-plus and ROE at 13.4% by Mar-13.
Valuations and target price: The stock trades at 19x PE and 2.2x PB for FY12E (parent
basis) – at and slightly above its five-year average, respectively. With a better growth and
profitability trajectory going ahead, we expect it to rerate to 23x PE and 2.2x PB based on
which we set our target price at INR1,300 implying a total potential return (including
dividends) of 18%. We continue to value ICICI Bank using a weighted average
combination of PE, PB, and economic profit model (EPM) methodologies.
While we are revising our earnings upwards, we are now rebalancing the weights of PE,
PB and DCF in our methodology from 75%, 15% and 10% to 50%, 20% and 30%,
respectively, to realign the valuations with the near macro uncertainties and increasing risks
to earnings’ growth for the sector (details inside). As a result of the offsetting effect, while we
continue to value to stock at 23.4x PE and 2.2x PB, we trim our 12-month target price of
INR1,350 to Rs1,300, implying a total potential return (including dividends) of 18%. Retain
Overweight. Key risks: (1) Slowing loan growth momentum; (2) spike in NPLs.
Valuation and risks
Overweight, Target Price INR1,300
We value ICICI Bank using a weighted average combination of PE, PB, and economic profit model
(EPM) methodologies. We are changing our weights for PE, PB and EPM from 75%, 15% and 10% to
50%, 20% and 30%, due to the following reasons: PE weight falls from 75% to 50% as near-term risks to
earnings growth increase for the sector led by higher inflation and crude prices; PB weight increases
marginally from 15% to 20% as although risk to book from asset quality and profitability deterioration is
not yet evident, some potential increase in riskiness has materialised from the macro overhangs of higher
inflation and crude prices; DCF (EPM) weight increases from 10% to 30% as investors refocus on
medium-term profitability and growth outlook vs near term prospects.
The three-stage EPM uses explicit forecasts until FY13e, followed by 10 years of semi-explicit forecasts.
The final stage of 12 years (fade period) assumes convergence of ROE and COE. EPM is based on the
assumptions in the following table:
ICICI: EPM assumptions
Semi-explicit forecasts for 10 yrs
Loan CAGR 14%
Dividend payout 30%
Fade period of 12 yrs
Risk free rate 8%
Beta 1.0
Equity risk premium 6%
Cost of Equity 14%
New Old
EPM value of Bank 506 469
EPM value of Subsidiaries 183 214
Total EPM value (including subsidiaries) 690 684
Source: HSBC estimates
We are reducing our 12-month target price to INR1,300 from INR1,350; see also the tables below. Under
our research model, for stocks without a volatility indicator, the Neutral band is 5ppt above and below our
hurdle rate for Indian stocks of 11%, or 6-16% around the current share price. Our target price of
INR1,300 suggests a potential return, including dividend yield, of 18%, which is above the Neutral band.
We therefore reiterate our Overweight rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank (ICICIBC)
OW: Reward > Risk
ICICI Bank is in the sweet spot where growth is accelerating
and costs are falling – as evidenced in 4Q 11 earnings today
Accordingly we raise our earnings estimates 11% and 15%
this year and next as ROE approaches 15% by FY13E
Reiterate OW rating; reduce target price to INR1,300 (from
INR1,350), implying a potential return of 18%
4QFY11 earnings surprised us positively by 13% and even though they were in line with
street estimates, the quality of earnings surprised positively. The stock ended up 1%,
outperforming the Bankex by 2%.
Key positives & surprises: While loan growth came in as expected, the 10bps increase in
margins to 2.7% surprised positively but is likely to correct slightly as deposit repricing
catches up to some extent. Fees surprised positively by 4%, particularly on the corporate
side as the domestic wholesale book displayed good growth traction. Core cost-income
ratio stayed steady at 43%. Thus, the continued improvement in asset quality led to lower
credit costs (73bps in 4Q11) ramping up profit growth to 44%.
Earnings outlook: With the Bank expected to grow its balance sheet 20% for the next
two years led by the domestic wholesale book, flattish margins and provisions, we
estimate profit growth of 31% and 24% y/y for FY12E and FY13E, respectively, with
ROA expanding to 1.5%-plus and ROE at 13.4% by Mar-13.
Valuations and target price: The stock trades at 19x PE and 2.2x PB for FY12E (parent
basis) – at and slightly above its five-year average, respectively. With a better growth and
profitability trajectory going ahead, we expect it to rerate to 23x PE and 2.2x PB based on
which we set our target price at INR1,300 implying a total potential return (including
dividends) of 18%. We continue to value ICICI Bank using a weighted average
combination of PE, PB, and economic profit model (EPM) methodologies.
While we are revising our earnings upwards, we are now rebalancing the weights of PE,
PB and DCF in our methodology from 75%, 15% and 10% to 50%, 20% and 30%,
respectively, to realign the valuations with the near macro uncertainties and increasing risks
to earnings’ growth for the sector (details inside). As a result of the offsetting effect, while we
continue to value to stock at 23.4x PE and 2.2x PB, we trim our 12-month target price of
INR1,350 to Rs1,300, implying a total potential return (including dividends) of 18%. Retain
Overweight. Key risks: (1) Slowing loan growth momentum; (2) spike in NPLs.
Valuation and risks
Overweight, Target Price INR1,300
We value ICICI Bank using a weighted average combination of PE, PB, and economic profit model
(EPM) methodologies. We are changing our weights for PE, PB and EPM from 75%, 15% and 10% to
50%, 20% and 30%, due to the following reasons: PE weight falls from 75% to 50% as near-term risks to
earnings growth increase for the sector led by higher inflation and crude prices; PB weight increases
marginally from 15% to 20% as although risk to book from asset quality and profitability deterioration is
not yet evident, some potential increase in riskiness has materialised from the macro overhangs of higher
inflation and crude prices; DCF (EPM) weight increases from 10% to 30% as investors refocus on
medium-term profitability and growth outlook vs near term prospects.
The three-stage EPM uses explicit forecasts until FY13e, followed by 10 years of semi-explicit forecasts.
The final stage of 12 years (fade period) assumes convergence of ROE and COE. EPM is based on the
assumptions in the following table:
ICICI: EPM assumptions
Semi-explicit forecasts for 10 yrs
Loan CAGR 14%
Dividend payout 30%
Fade period of 12 yrs
Risk free rate 8%
Beta 1.0
Equity risk premium 6%
Cost of Equity 14%
New Old
EPM value of Bank 506 469
EPM value of Subsidiaries 183 214
Total EPM value (including subsidiaries) 690 684
Source: HSBC estimates
We are reducing our 12-month target price to INR1,300 from INR1,350; see also the tables below. Under
our research model, for stocks without a volatility indicator, the Neutral band is 5ppt above and below our
hurdle rate for Indian stocks of 11%, or 6-16% around the current share price. Our target price of
INR1,300 suggests a potential return, including dividend yield, of 18%, which is above the Neutral band.
We therefore reiterate our Overweight rating on the stock.
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