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ICICI Bank (ICICIBC IN; Last Price: INR858; DB Rec: Hold)
Stock down 11% since S&P downgrade. Trading at 22% discount to past five year
average valuations The stock is down 17% over the past 1 month (Sensex down 10%)
and is trading at a valuation of 1.6x FY12E P/B. This implies that the core-banking
business (excluding the value of non-banking businesses and investments in
subsidiaries) is trading at 1x FY12E P/B. The stock is trading at a 1 Std dev. below its five
year average of 1-yr fwd P/B.
Stock is pricing in a contraction in NIMs, versus our baseline estimate of +2.6%. In
addition, the stock is currently pricing in a higher-than-expected rise in NPL from power
exposure and low NIM in the overseas operations. However, we believe that any
increase in infrastructure NPL would show up only in FY13. We do not expect ICICI
Bank’s NPLs to rise to levels disproportionately higher than the rise in system wide
NPLs. Currently, the spreads in the overseas business is ~90bps. The management has
guided for spreads to increase to ~125bps over the next 4-6 quarters. There are
concerns on overseas cost of funds going up and adversely impacting spreads in the
overseas business.
Catalysts for triggering near term outperformance Policy reforms catering to
infrastructure/power sector would assuage the asset quality concerns from this sector.
At the same time stability in overseas inter-bank funding market with adequate dollar
liquidity should reduce the concerns on overseas operations.
The bank is firmly back on growth path and domestic operations are likely to grow in line
with the banking system. NIM has been stable at ~2.6% and the bank should be able to
better protect its NIM compared to other banks due to healthy CASA mix.
In case of a mild stress case (India GDP growth slowing to 7.5%) earnings downside is
7% and in case of severe stress case (India GDP growth slowing to 6.5% and developed
markets moving into recession) earnings downside is 18%.
Key Risks: (i) possible higher-than-expected slippage from restructured assets, if the
global sluggishness were to continue and ii) difficulties in re-energising the retail assets
franchise as ICICI has been keeping a low profile in many retail segments for the last two
years. Main upside possibilities are: i) a more emphatic return of corporate capex than
expected and hence corporate loan book ii) faster leveraging of the Bank of Rajasthan
network than estimated
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank (ICICIBC IN; Last Price: INR858; DB Rec: Hold)
Stock down 11% since S&P downgrade. Trading at 22% discount to past five year
average valuations The stock is down 17% over the past 1 month (Sensex down 10%)
and is trading at a valuation of 1.6x FY12E P/B. This implies that the core-banking
business (excluding the value of non-banking businesses and investments in
subsidiaries) is trading at 1x FY12E P/B. The stock is trading at a 1 Std dev. below its five
year average of 1-yr fwd P/B.
Stock is pricing in a contraction in NIMs, versus our baseline estimate of +2.6%. In
addition, the stock is currently pricing in a higher-than-expected rise in NPL from power
exposure and low NIM in the overseas operations. However, we believe that any
increase in infrastructure NPL would show up only in FY13. We do not expect ICICI
Bank’s NPLs to rise to levels disproportionately higher than the rise in system wide
NPLs. Currently, the spreads in the overseas business is ~90bps. The management has
guided for spreads to increase to ~125bps over the next 4-6 quarters. There are
concerns on overseas cost of funds going up and adversely impacting spreads in the
overseas business.
Catalysts for triggering near term outperformance Policy reforms catering to
infrastructure/power sector would assuage the asset quality concerns from this sector.
At the same time stability in overseas inter-bank funding market with adequate dollar
liquidity should reduce the concerns on overseas operations.
The bank is firmly back on growth path and domestic operations are likely to grow in line
with the banking system. NIM has been stable at ~2.6% and the bank should be able to
better protect its NIM compared to other banks due to healthy CASA mix.
In case of a mild stress case (India GDP growth slowing to 7.5%) earnings downside is
7% and in case of severe stress case (India GDP growth slowing to 6.5% and developed
markets moving into recession) earnings downside is 18%.
Key Risks: (i) possible higher-than-expected slippage from restructured assets, if the
global sluggishness were to continue and ii) difficulties in re-energising the retail assets
franchise as ICICI has been keeping a low profile in many retail segments for the last two
years. Main upside possibilities are: i) a more emphatic return of corporate capex than
expected and hence corporate loan book ii) faster leveraging of the Bank of Rajasthan
network than estimated
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