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Lending business return ratios converging to industry levels: Low return ratios
has been the primary reason for relatively low valuations for ICICI’s lending
business. ROAs have inched up from ~1.0% in FY09 to 1.4% in FY11 and we
expect margin expansion to drive ROAs to ~1.6%. Slower growth could
marginally delay the leveraging up process. However, lending business ROEs are
expected to inch up to ~15.5% in FY13 and ~17% in FY14, closing the ROE gap
significantly v/s peers. This should drive lower discounts v/s peers.
Asset quality – Power remains a concern, RE not so much, High retail and low
SME book comforting: Power and asset owners exposure continue to remain a
risk but ICICI bank’s book is relatively more seasoned with ~50% operational
projects. We are less worried about the Rs200bn of commercial RE exposure,
where loss, given defaults, is low, given high LTV (~2x cover). Also, high retail
exposure (~35% of loan book) and low share of SME book provides comfort.
Valuations attractive even after factoring in write‐offs from stress book: Asset
quality concerns do remain but market is discounting significant stress, with the
book trading at 1.3x Sep-12 book. Our Sep-12 PT of Rs900/share implies ~30%
upside and we believe higher lending ROEs would be a key driver along with
stable quarterly performance. Current valuations are trading at ~30% discount
to historical average and factoring in book write-downs from Infra portfolio and
stress sectors, valuation is still at ~20% discount.
Different Perspectives – Sanity check : ICICI v/s HDFCB: ICICI bank’s domestic
book is comparable in size to HDFCB and assuming very conservative valuations
for ICICI’s subsidiaries and international book, current market cap imply a value
of Rs540bn for ICICI’s domestic business v/s >Rs1000bn of HDFCB’s market cap
with similar ROA levels and marginally lower ROEs. HDFCB’s consistency, liability
franchise and low risk asset book deserves a hefty premium. However, we
believe 80-90% premium is high. Similar sanity check showed ICICI’s over
valuation in Nov-10, with ICICI's domestic book value at par with HDFCB’s Mcap.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lending business return ratios converging to industry levels: Low return ratios
has been the primary reason for relatively low valuations for ICICI’s lending
business. ROAs have inched up from ~1.0% in FY09 to 1.4% in FY11 and we
expect margin expansion to drive ROAs to ~1.6%. Slower growth could
marginally delay the leveraging up process. However, lending business ROEs are
expected to inch up to ~15.5% in FY13 and ~17% in FY14, closing the ROE gap
significantly v/s peers. This should drive lower discounts v/s peers.
Asset quality – Power remains a concern, RE not so much, High retail and low
SME book comforting: Power and asset owners exposure continue to remain a
risk but ICICI bank’s book is relatively more seasoned with ~50% operational
projects. We are less worried about the Rs200bn of commercial RE exposure,
where loss, given defaults, is low, given high LTV (~2x cover). Also, high retail
exposure (~35% of loan book) and low share of SME book provides comfort.
Valuations attractive even after factoring in write‐offs from stress book: Asset
quality concerns do remain but market is discounting significant stress, with the
book trading at 1.3x Sep-12 book. Our Sep-12 PT of Rs900/share implies ~30%
upside and we believe higher lending ROEs would be a key driver along with
stable quarterly performance. Current valuations are trading at ~30% discount
to historical average and factoring in book write-downs from Infra portfolio and
stress sectors, valuation is still at ~20% discount.
Different Perspectives – Sanity check : ICICI v/s HDFCB: ICICI bank’s domestic
book is comparable in size to HDFCB and assuming very conservative valuations
for ICICI’s subsidiaries and international book, current market cap imply a value
of Rs540bn for ICICI’s domestic business v/s >Rs1000bn of HDFCB’s market cap
with similar ROA levels and marginally lower ROEs. HDFCB’s consistency, liability
franchise and low risk asset book deserves a hefty premium. However, we
believe 80-90% premium is high. Similar sanity check showed ICICI’s over
valuation in Nov-10, with ICICI's domestic book value at par with HDFCB’s Mcap.
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