ICICI Bank Where is the upside? Downgrade to Neutral : Macquarie Research

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ICICI Bank
Where is the upside? Downgrade to
Neutral
Event
 Downgrade to Neutral on valuations, TP unchanged: After the sharp rally
recently, valuations look stretched. Downgrade to Neutral from Outperform.
Impact
 Restructuring to pick up, negative surprises can’t be ruled out: Going
ahead, the quantum of restructured assets is expected to pick up. We don’t
expect asset quality to deteriorate to the extent seen in the previous cycle.
However there is stress in certain mid-corporate and power sector exposures
that ICICI has put on its books and are likely to be restructured over the course
of the next few years.
 Aggressive guidance on credit costs: Management guidance on FY13E
credit costs (provisions on NPLs as a percentage of advances) to be around
75bps marginally higher than FY12E is aggressive in our view. If ICICI
manages to deliver these credit cost numbers on the back of higher
restructuring, we believe the market is not going to take it well. We have
conservatively built in 110bps of credit costs into our numbers. If we build in
75bps into our model, our earnings estimates would be roughly 11% higher for
FY13E.
 Growth remains a worry: Management continues to be a bit cautious on
growth. Performance with respect to the retail segment has been very
unsatisfactory and much of the growth in the past two years has come from the
corporate segment, particularly infrastructure. The bank has been struggling to
grow its retail book compared to some of its peers who have done very well.
 Risk of equity dilution is less: The proposed Basel-III norm is unlikely to
result in equity dilution for ICICI, at least in the early years of implementation as
ICICI is sufficiently capitalised. That isn’t the case with most of its peers who
would come to the market over the course of next two years to raise capital.
Hence the risk of equity dilution is also pretty low over the next two years in our
view. By that time we believe there could be some repatriation of capital from
the Canada business further giving some cushion. Management has guided
that, according to their internal calculations, they don’t need to raise any equity
capital for the next three years.
Earnings and target price revision
 We marginally increase FY13E and FY14E EPS by 3% and 1 % due to slightly
lower credit costs. No change in TP.
Price catalyst
 12-month price target: Rs855.00 based on a Sum of Parts methodology.
 Catalyst: Increase in restructured assets quantum
Action and recommendation
 See limited upside from current levels: ICICI Bank now trades at 1.5x FY13E
P/BV which is inline with its historic averages. Neutral.
Valuations and TP
We value ICICI Bank on a sum-of-parts basis in which the core banking business is valued using a
single stage Gordon growth model and the life insurance business is valued using an appraisal value
method which is the sum of the embedded value and new business value. Other businesses are
valued either as a % of AUM or a multiple of book value.
Fig 7 ICICI Bank: Sum-of-parts valuation
(INR m except per share data) Total value % Stake
Value attributable
to ICICI Bank
Per Share
value Comments
Core business 750,010 100% 750,010 673 1.6x FY13E adjusted book value
ICICI Securities including PD 9,960 100% 9,960 9 10x FY13E Profits
ICICI Venture 11,582 100% 11,582 10 10% of FY13E AUM
ICICI Prudential Life 128,574 74% 95,145 85 Appraisal value, New business margin 12%. NBAP
multiple 12x
ICICI Lombard General Insurance 10,784 74% 7,980 7 0.8x Capital Infused
Prudential ICICI AMC 40,462 51% 20,635 19 5% of FY13E AUM
ICICI Home Finance 23,261 100% 23,261 21 1.5x FY13E NW
International banking subs 33,570 100% 33,570 30 10.0x FY13E profits
Final target price 822,614 855
Source: Company data, Macquarie Research, March 2012
The core banking business is valued using a two stage Gordon growth model where P/BV = RoE *
{(p(1+g) * (1- (1+g)n/(1+r)n)) + (pn(1+g)n(1+gn))/((r-gn)(1+r)n)}, where g=growth rate for the first n
(high-growth period) years, p=payout ratio in the first n years, gn=perpetual growth rate,
pn=perpetual payout ratio.
Fig 8 Valuation of core business using a two stage Gordon growth model
RoE 17.2%
g (initial growth) 14%
r (CoE) 14%
gn (perpetual growth rate) 4%
n (initial growth period, yrs) 10
Target P/BV 1.63x
Source: Macquarie Research, March 2012