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ICICI Bank (ICBK.BO)
Upgrade to Buy: Franchise Gains to Show Through
Upgrading to Buy with Rs1,000 target price — We are upgrading ICICI Bank
to Buy (1M) with a Rs1,000 target price. Our target price is based on our EVA
methodology and benchmarked off a sum-of-parts valuation. We value ICICI
Bank’s core banking business at 1.8x 1yr Fwd P/BV (1.25x for international and
2.0x for domestic).
Reduce earnings by 6-7% over FY12-13E — We reduce our FY12-13E
earnings estimates by 6-7% primarily on account of lower net interest margins
and lower fee incomes.
Consolidating franchise gains, longer-term positive — We believe ICICI
Bank has consolidated its strong franchise over the last couple of years and has
stayed true to its low risk, low growth approach. While there are likely asset
pressures in the corporate, infrastructure segment (higher growth in recent
years), they are likely to be relatively offset by its lower SME exposure. Longer
term, we believe ICICI Bank’s continued operating improvements –
improvements in net interest margins, cost efficiencies and return profile – will
lead to higher valuations and stock returns.
Quant View: Unattractive — ICICI Bank currently lies in the Unattractive
quadrant of our Value-Momentum map with weak momentum and weak value
scores.
ICICI Bank currently lies in the Unattractive quadrant of our Value-Momentum map
with weak momentum and weak value scores. It has been a resident there since the
past 3 months. Compared to its peers in the Banks sector, ICICI Bank fares worse
on the valuation metric and on the momentum metric. On the other hand, compared
to its peers in its home market of India, ICICI Bank fares better on the valuation
metric but worse on the momentum metric.
From a macro perspective, ICICI Bank has a high beta to the region so is likely to
rise (or fall) faster than the region. It is also likely to benefit from falling commodity
(ex-oil) prices, falling EM yields, and a weaker US Dollar.
ICICI Bank
Company description
ICICI Bank was founded in 1994 by ICICI Ltd., which was then the country's leading
development finance institution. It is a leader in retail lending, with more than 30%
market share in most consumer-finance segments. ICICI Bank also has
international banking operations as one of its key focus areas.
Investment strategy
We rate ICICI Bank as Buy/Medium Risk (1M). We believe the business offers
meaningful upside on fundamental operating improvements (margins, asset quality,
business balance, and leverage on its franchise), and its profitability has been
improving continuously. ICBK's management has made aggressive strategic moves
in the right direction and remained firm on its steady growth/low risk path. This
signifies healthy longer-term prospects for the business. There are some near-term
pressures such as low ROEs and a large infrastructure, corporate, international
lending book, but we believe the current valuations offer a reasonable risk/return
trade off. Its financial services subsidiaries, particularly insurance, also add
meaningful value and complement its core banking business, but we believe value
gains will probably be more back-ended due to current volatility in financial services
segments. We believe the recent consolidation in ICICI Bank’s core business could
be a meaningful longer-term upside for the stock. Key downside risks include
disappointments on business performance; lower growth and suppressed return
profile, which still remains relatively low.
Valuation
Our target price of Rs1,000 is based on our EVA, which we use as our primary
methodology for the Indian banking universe because we believe it better captures
the long-term value of a business. Our EVA value is based on: a) Long-term Cost-
Income ratio of 38%; b) Long-term loan loss estimates of 100bps; c) Rs183 as
estimated value of subsidiaries (Sep'12); and d) Risk Free Rate of 8.0%.
We also benchmark our valuation based on a Sum-of-the-Parts analysis. This
equates to Rs947 per share. We value ICICI Bank's domestic banking business on
2.0x 1yr Fwd PBV (Sep'12) and international business at 1.25x, translating into an
overall PBV target multiple of 1.8x 1yr Fwd. Our target multiple is based on stable
asset quality, sustained improvements in deposit franchise and a loan growth
revival. The 1.8x PBV multiple is at the lower end of our target for comparable
private banks (2.0x- 3.5x) given ICBK's still lower return profile. The rest of the value
is driven by its subsidiaries: life insurance at Rs81, non-life insurance at Rs18, AMC
at Rs14, ICICI Securities at Rs10, primary dealer at Rs4, and venture fund at Rs5.
The subsidiaries are valued based on industry benchmarks.
While ICBK's target multiple is relatively high relative to returns (its cost of capital is
higher than its ROE); we believe its large presence in the market, its capital
position, and the inherent leverage of the business, should enable it to return to
higher profitability and thereafter higher valuations.
Risks
We assign a Medium Risk rating to ICICI Bank. Our quantitative risk-rating system,
which tracks 260-day historical share price volatility, suggests Low Risk. We view a
Medium Risk rating as more appropriate given the bank's large international
portfolio and its relatively lower return profile. Downside risks that could impede the
shares from reaching our target price include: (1) higher than expected deterioration
in asset quality; (2) reduction in net interest margins; (3) aggressive expansion in
international operations where returns appear low and risk levels relatively high; and
(4) inability to leverage capital, which keeps ROEs low.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank (ICBK.BO)
Upgrade to Buy: Franchise Gains to Show Through
Upgrading to Buy with Rs1,000 target price — We are upgrading ICICI Bank
to Buy (1M) with a Rs1,000 target price. Our target price is based on our EVA
methodology and benchmarked off a sum-of-parts valuation. We value ICICI
Bank’s core banking business at 1.8x 1yr Fwd P/BV (1.25x for international and
2.0x for domestic).
Reduce earnings by 6-7% over FY12-13E — We reduce our FY12-13E
earnings estimates by 6-7% primarily on account of lower net interest margins
and lower fee incomes.
Consolidating franchise gains, longer-term positive — We believe ICICI
Bank has consolidated its strong franchise over the last couple of years and has
stayed true to its low risk, low growth approach. While there are likely asset
pressures in the corporate, infrastructure segment (higher growth in recent
years), they are likely to be relatively offset by its lower SME exposure. Longer
term, we believe ICICI Bank’s continued operating improvements –
improvements in net interest margins, cost efficiencies and return profile – will
lead to higher valuations and stock returns.
Quant View: Unattractive — ICICI Bank currently lies in the Unattractive
quadrant of our Value-Momentum map with weak momentum and weak value
scores.
ICICI Bank currently lies in the Unattractive quadrant of our Value-Momentum map
with weak momentum and weak value scores. It has been a resident there since the
past 3 months. Compared to its peers in the Banks sector, ICICI Bank fares worse
on the valuation metric and on the momentum metric. On the other hand, compared
to its peers in its home market of India, ICICI Bank fares better on the valuation
metric but worse on the momentum metric.
From a macro perspective, ICICI Bank has a high beta to the region so is likely to
rise (or fall) faster than the region. It is also likely to benefit from falling commodity
(ex-oil) prices, falling EM yields, and a weaker US Dollar.
ICICI Bank
Company description
ICICI Bank was founded in 1994 by ICICI Ltd., which was then the country's leading
development finance institution. It is a leader in retail lending, with more than 30%
market share in most consumer-finance segments. ICICI Bank also has
international banking operations as one of its key focus areas.
Investment strategy
We rate ICICI Bank as Buy/Medium Risk (1M). We believe the business offers
meaningful upside on fundamental operating improvements (margins, asset quality,
business balance, and leverage on its franchise), and its profitability has been
improving continuously. ICBK's management has made aggressive strategic moves
in the right direction and remained firm on its steady growth/low risk path. This
signifies healthy longer-term prospects for the business. There are some near-term
pressures such as low ROEs and a large infrastructure, corporate, international
lending book, but we believe the current valuations offer a reasonable risk/return
trade off. Its financial services subsidiaries, particularly insurance, also add
meaningful value and complement its core banking business, but we believe value
gains will probably be more back-ended due to current volatility in financial services
segments. We believe the recent consolidation in ICICI Bank’s core business could
be a meaningful longer-term upside for the stock. Key downside risks include
disappointments on business performance; lower growth and suppressed return
profile, which still remains relatively low.
Valuation
Our target price of Rs1,000 is based on our EVA, which we use as our primary
methodology for the Indian banking universe because we believe it better captures
the long-term value of a business. Our EVA value is based on: a) Long-term Cost-
Income ratio of 38%; b) Long-term loan loss estimates of 100bps; c) Rs183 as
estimated value of subsidiaries (Sep'12); and d) Risk Free Rate of 8.0%.
We also benchmark our valuation based on a Sum-of-the-Parts analysis. This
equates to Rs947 per share. We value ICICI Bank's domestic banking business on
2.0x 1yr Fwd PBV (Sep'12) and international business at 1.25x, translating into an
overall PBV target multiple of 1.8x 1yr Fwd. Our target multiple is based on stable
asset quality, sustained improvements in deposit franchise and a loan growth
revival. The 1.8x PBV multiple is at the lower end of our target for comparable
private banks (2.0x- 3.5x) given ICBK's still lower return profile. The rest of the value
is driven by its subsidiaries: life insurance at Rs81, non-life insurance at Rs18, AMC
at Rs14, ICICI Securities at Rs10, primary dealer at Rs4, and venture fund at Rs5.
The subsidiaries are valued based on industry benchmarks.
While ICBK's target multiple is relatively high relative to returns (its cost of capital is
higher than its ROE); we believe its large presence in the market, its capital
position, and the inherent leverage of the business, should enable it to return to
higher profitability and thereafter higher valuations.
Risks
We assign a Medium Risk rating to ICICI Bank. Our quantitative risk-rating system,
which tracks 260-day historical share price volatility, suggests Low Risk. We view a
Medium Risk rating as more appropriate given the bank's large international
portfolio and its relatively lower return profile. Downside risks that could impede the
shares from reaching our target price include: (1) higher than expected deterioration
in asset quality; (2) reduction in net interest margins; (3) aggressive expansion in
international operations where returns appear low and risk levels relatively high; and
(4) inability to leverage capital, which keeps ROEs low.
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