ICICI Bank :: Avendus 2012 top ideas

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Concerns on the asset quality may be overdone
 We forecast c3% improvement in standalone RoE over the next three
years. NPL provision as a percentage of assets is likely to stay below
the peak of FY07‐FY10. Restructured loans have fallen from the peak of
3.0% to 1.1% of loans at end Sep11. However, there may be an
increase in restructured loans and slippages in the corporate segment
in the near term, therefore, we raise our assumptions for incremental
NPL and lower our net profit forecast for FY12‐FY14 by up to 12%. We
roll over the TP to Dec12 and lower it to INR1,075. The TP values the
stock at a one‐year forward P/B of 1.88x. We maintain Buy. Higher
than estimated NPL provision is the key risk.
Large potential upside over the next 12‐month period
Our Dec12 TP implies a potential return of c54% over the 12‐month period. The
TP values ICICIBC at a one‐year forward adjusted P/B of 1.88x. If the P/B for the
core business returns to the normal mean of 1.32x during FY10‐FY11, and the
value of subsidiaries remains constant, the potential upside could be c43%.
Growth concerns; NPL risk from infra sector drove underperformance
In 2011, ICICIBC underperformed the Bankex and the Sensex by 8% and 14%,
respectively. The underperformance was largely driven by concerns on revival
in loan growth, falling market share in the retail segment and the NPL risk
emerging from the infrastructure sector. However, despite high concerns, gross
and net NPL ratio fell by 33‐bp and 14‐bp, to 4.1% and 0.8%, respectively, over
the past two quarters. While loan growth revived to 20% y‐o‐y, it was driven by
corporate loans. Retail loan growth has stayed below consensus.
20% upside to fair value even if NPLs rise to the peak of FY07‐FY08
Even if the worst‐case scenario is applied for FY12f‐FY14f – incremental NPL at
1.45% (mean during FY07‐FY08), net NPL ratios at 0.98%, NPL provisions/assets
at 0.71% and semi‐explicit period growth of 17% – the DCF value for the
standalone bank is INR625/share. Including the value of subsidiaries
(INR243/share), the fair value has a potential upside of 24% to the CMP.
Forecast 287‐bp improvement in RoE over FY12‐FY14
Net interest income and falling growth in NPL provisions in FY13f‐FY14f are
likely to support a 287‐bp rise in RoE to c13%. The NPL provision is likely to fall
by 11‐bp to 0.40% y‐o‐y in FY12f. Achieving a provision coverage ratio higher
than the regulatory requirement has reduced the burden, unlike in FY11. A fall
in the proportion of restructured loans from the peak of 3.0% in Dec08 to 1.1%
of loans at end Sep11 is likely to restrict slippages from this portfolio.
Roll over TP to Dec12; maintain Buy
We value ICICIBC based on the P/E, P/B and DCF methods. We lower the semiexplicit
period growth assumption in the DCF by 5% to 20%. We raise our
estimates for incremental NPL and NPL provisions/assets by 15‐bp and 5‐bp,
respectively, for FY12f. We lower our net profit forecast for FY12‐FY13 by up to
12%. We roll over the TP to Dec12 and lower it to INR1,075. Maintain Buy. Rise
in incremental NPL and NPL provisions are key risk factors.


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