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ICICI Bank
NPL worries emerge again
Event
Downgrade the stock to Neutral, cut earnings and TP sharply. We
downgrade ICICI to Neutral from Outperform. We reduce earnings for FY13E
and FY14E by 16% and 19%, respectively, on account of a sharp increase in
credit costs. We reduce our TP by 34% to Rs920 on account of a sharp
reduction in the core business multiple from 2.80x to 1.72x, driven by lower
earnings growth and a lower sustainable ROE.
Impact
Credit costs to increase materially in FY13E: We forecast a 40bp increase in
credit costs, from 90bp in FY12E to 130bp in FY13E, driven by increased
slippages and higher restructuring of advances. Nearly 80% of the book built up
in the past year has been from the corporate segment, with stressed sectors
like commercial real estate and power growing a very substantial 70%+.
Opex pressure – regulatory obligations the key culprit: The need to open
25% of branches in rural areas, coupled with tougher priority sector rules, is
likely to put more pressure on opex for private banks in general in trying to
meet PSL requirements. We expect opex to average assets to increase 20bp
over the next few years and stabilise around 190bp.
Low margins leave little room for absorbing shocks: ICICI Bank’s margins
have remained stagnant at around the 2.6% level, and we think the bank’s
low-margin structure leaves little room to absorb asset quality shocks.
Although margins for international business done out of branches are
expected to improve, domestic business margins are not expected to show
any material improvement.
International subsidiaries – problem of excess capital: The international
banking subsidiaries in the UK and Canada are saddled with excess capital.
The bank is struggling to bring this capital back to India and has not
articulated a well defined plan to do so or put the capital to any use in the near
term. In turn this is unlikely to be beneficial for return ratios for the
consolidated entity.
Earnings and target price revision
Decrease EPS for FY13E and FY14E by 16% and 19%, respectively, due to
the assumption of higher credit costs. Reduce TP by 34% to Rs920, mainly on
account of a reduction in the core business multiple. We also partly cut our
valuation for subsidiaries.
Price catalyst
12-month price target: Rs920.00 based on a Sum of Parts methodology.
Catalyst: Increased slippages and, consequently, higher provisioning
suppressing earnings.
Action and recommendation
Avoid ICICI, risk-reward is still not favourable; we would look elsewhere:
Despite the recent sharp correction in ICICI shares, we believe the riskreward
is still unfavourable. Neutral with TP of Rs920.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank
NPL worries emerge again
Event
Downgrade the stock to Neutral, cut earnings and TP sharply. We
downgrade ICICI to Neutral from Outperform. We reduce earnings for FY13E
and FY14E by 16% and 19%, respectively, on account of a sharp increase in
credit costs. We reduce our TP by 34% to Rs920 on account of a sharp
reduction in the core business multiple from 2.80x to 1.72x, driven by lower
earnings growth and a lower sustainable ROE.
Impact
Credit costs to increase materially in FY13E: We forecast a 40bp increase in
credit costs, from 90bp in FY12E to 130bp in FY13E, driven by increased
slippages and higher restructuring of advances. Nearly 80% of the book built up
in the past year has been from the corporate segment, with stressed sectors
like commercial real estate and power growing a very substantial 70%+.
Opex pressure – regulatory obligations the key culprit: The need to open
25% of branches in rural areas, coupled with tougher priority sector rules, is
likely to put more pressure on opex for private banks in general in trying to
meet PSL requirements. We expect opex to average assets to increase 20bp
over the next few years and stabilise around 190bp.
Low margins leave little room for absorbing shocks: ICICI Bank’s margins
have remained stagnant at around the 2.6% level, and we think the bank’s
low-margin structure leaves little room to absorb asset quality shocks.
Although margins for international business done out of branches are
expected to improve, domestic business margins are not expected to show
any material improvement.
International subsidiaries – problem of excess capital: The international
banking subsidiaries in the UK and Canada are saddled with excess capital.
The bank is struggling to bring this capital back to India and has not
articulated a well defined plan to do so or put the capital to any use in the near
term. In turn this is unlikely to be beneficial for return ratios for the
consolidated entity.
Earnings and target price revision
Decrease EPS for FY13E and FY14E by 16% and 19%, respectively, due to
the assumption of higher credit costs. Reduce TP by 34% to Rs920, mainly on
account of a reduction in the core business multiple. We also partly cut our
valuation for subsidiaries.
Price catalyst
12-month price target: Rs920.00 based on a Sum of Parts methodology.
Catalyst: Increased slippages and, consequently, higher provisioning
suppressing earnings.
Action and recommendation
Avoid ICICI, risk-reward is still not favourable; we would look elsewhere:
Despite the recent sharp correction in ICICI shares, we believe the riskreward
is still unfavourable. Neutral with TP of Rs920.
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