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Fresh investments with a long-term horizon can be considered in the stock of ICICI Bank, the country's largest private sector bank.
As ICICI Bank embarks on a growth phase after cleaning up its loan book over the last three fiscal years, the prospects seem promising.
The bank in FY10 adopted a strategy to improve low-cost deposit ratio and asset quality, while preserving capital and reducing operating costs.
Following the success of this strategy from this fiscal it has shifted its focus to credit growth and improved customer service while maintaining good operating metrics. The bank reduced its wholesale deposit dependence and rebalanced its loan book by reducing unsecured loans.
At the current market price of Rs 1,060, the stock trades at price-to-earnings ratio of 19.8 times based on consolidated FY-11 numbers. The fair value of all the subsidiaries (AMC, insurance, securities and international subsidiaries) works out to about Rs 260 per share.
At current market price, the price-to-adjusted book value for the standalone business would be about 2 times on the FY12 book. The valuation puts ICICI Bank at a discount to most of the new private sector banks.
Strong capital adequacy ratio (19.54 per cent as of March 2011), high CASA proportion (45 per cent of the total deposits) aided improvement in net interest margin (NIM) of the bank.
The bank is under-leveraged in terms of both balance sheet and branch network. The high proportion of capital in its books can be utilised to drive future growth of the loan book. The recent additions to branch network (with more than 1,000 of 2,500 branches added in 2010 and 2011) may attract retail deposits and also improve fee income prospects. This, coupled with strong growth in credit and fall in provisions, may help improve the bank's return on equity ratio which is low at 9.4 per cent. The bank has already achieved provision coverage as mandated by the RBI. The NIM for 2010-11 was at 2.6 per cent, which can be maintained at current levels as margins on overseas loans improve. The international loans enjoyed a low margin of 0.85 per cent last fiscal; while new loans are fetching 1.5-2 per cent margins.
Additionally around 57 per cent of the loan book is pegged to floating rates, with a third of fixed-rate loans maturing this year, they may get re-priced at the higher rates.
ICICI Bank has hiked its base rate by 1.75 percentage points till date. The bank continues to concentrate on corporate and international loans to domestic customers for credit growth. Secured retail opportunities may continue to increase given its branch expansion.
RISK
ICICI Bank's dependence on rural infrastructure development funds to meet priority lending sector targets is weighing heavily on the margins.
It is also losing money on security receipts on NPAs sold to Asset Reconstruction Company. Any slippage would lead to higher loss from this portfolio.
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