ICICI Bank - Steady on asset quality and NIMs; cautious on growth; visit note; Buy ::Edelweiss

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ICICI Bank (ICICIBC IN, INR 653, Buy)

We met up with the management of ICICI Bank. In terms of strategy, the focus is clearly on asset quality and margin improvement over the near term on which, it is fairly confident of performing well. However, credit growth is likely to be subdued at 15%-18% over FY12-13E which could have a bearing on the fee income as well. Allaying recent concerns due to CDS widening for the bank, the team mentioned that ALM for international book is well balanced for FY12-13E. We believe ICICI Bank is relatively better placed for a tougher macroeconomic scenario in terms of credit cost impact on profitability and net worth. At current valuations of 0.9x FY13E ABV (adjusting for subsidiaries value at INR182/share), risk reward is clearly in its favour. We reiterate our ‘BUY’ and top pick call.

Loan growth: Painting a cautious picture

The bank is prioritizing asset quality maintenance and NIM improvement over growth (guidance of 15%-18% for FY12-13E). Of this, retail segment is likely to grow in early teens while corporate book will track industry numbers on working capital demand and milestone based disbursements for infra projects. On the international front, given the focus shift to asset quality along with the recent surge in funding costs (Libor+450bps vis-à-vis Libor+200bps in May-June 2011), growth will be lower than expected.

Asset quality: Restructuring to increase, LLP to remain at ~70bps

Of the INR345bn worth cases referred to CDR industry-wide in H1FY12, ICICI Bank’s exposure is about INR11bn which might get restructured. The major one is GTL Ltd at INR6.5bn including the INR2bn equity exposure (MTM hit likely to be INR700mn in Q3FY12 at CMP). The exposure to Kingfisher is INR6bn including INR1.7bn of equity. On this account, it has protected its interests partially by effecting guarantees on group companies of promoters which are kept out of the consortium. In power, it has no exposure to gas and UMPP projects while ~50% of the exposure is towards projects under implementation. While some projects might get restructured, given their economic value with a tail risk, loss could be minimal.  On SMEs, limited exposure at 4.7% as against the sector average of about 15% provides comfort. Overall, the bank remains confident of LLP for H2FY12 at H1FY12 levels (~70bps) despite NPV hit on CDR cases. For FY13E, LLP guidance is of 80-100 bps. We are building in ~1.1% LLP.