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ICICI Bank
Significant improvement likely in NPAs: Gross NPAs improved to
4.5% in FY11 from 5.1% in FY10. There is plenty of scope for further
improvement on that front as, with incremental slippage under control,
recovery will accelerate and balance sheet growth will return to normal.
Slippage has improved sharply from 3.2% in FY10 to 1.4% in FY11. We
conservatively assume it to increase to 1.7% in FY12-13.
Improvement in NIMs: NIMs improved by 10 bps in FY11 to 2.6%
over last year. Despite anticipated increase in the cost of deposits, we
expect NIMs to improve as the bank’s proportion of low yielding
overseas loans decreases, incremental yield on overseas loans
improves, losses on securitized portfolio that gets deducted from
interest income run off over the next 18-24 months and proportion of
security receipts from ARCIL decreases.
Credit growth regains strength: After degrowth in the loan book in
FY10, the bank is back on the growth trajectory, as it aggressively sorts
out NPA issues. We believe high capital adequacy of 19.5% and
reduction in legacy NPLs would bring its growth at par with the industry
in FY12. The management has guided a growth of 20% in FY12.
Stronger fee income: Fee income had slowed down significantly in
line with credit growth as most part of it is linked to credit. With
improvement in credit, fee income is also set to increase.
Significant improvement in ROE: With improvement in all key
parameters like CASA, NIMs, cost-to-income ratio and slippages, we
expect its ROE to improve from current 9.7% to 13.4% in FY13. Its
current Tier-I ratio at 13.2% indicates it will not need to raise equity
capital for the next three to five years, which will give further push to
ROE.
Valuation: At CMP the stock trades at 17.2x and 14.9x FY12E and
FY13E earnings, and at 2.2x and 2.0x P/ABV FY12E and FY13E
respectively. Stripping out value for subsidiaries, it is trading at 11.8x
P/E FY13E and 1.6 P/ABV FY13E, which we feel is cheap considering its
pan-India presence, huge branch network and improved ROE. A listing
of some of its subsidiaries in insurance and asset management would
provide it further upside. We expect an ROA of 1.7% and ROE of 13.4%
in FY13E. We initiate coverage on the stock with a BUY rating and price
target of Rs1,340 per share. We value it on SOTP basis on P/ABV of
2.0x FY13E for the parent and Rs234 for subsidiaries.
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