Good loans are made in bad times
Action: Upgrade to BUY with a TP of INR1,165
We upgrade ICICI Bank to BUY, with a TP of INR1,165. In our view, ICICI
will be relatively better shielded from the asset quality deterioration
expected in the Indian banking sector over the next several quarters
thanks to its balance sheet consolidation during FY09-FY10. While other
banks were expanding their loan books at a rapid pace, ICICI did not take
aggressive exposure to sectors where asset quality is now suspect. Its
ROE (on the best capital base in the system), which was stuck in the 10-
12% range, is now expected to increase to 15% (consolidated) by FY13F,
driven by NIM expanding to 2.9% in FY13F from 2.7% in FY12,
decreasing LLPs and as capital returns from subsidiaries.
Expect LLPs of 66bps and standalone ROE of 13.3% for FY13F
Asset quality has been improving steadily and we expect incremental
delinquency per quarter to average 0.66% for FY13F versus 0.97% in
FY12 and 1.27% in FY11. We expect loan-loss provisions of 0.66% for
FY13F versus our earlier expectation of 0.93% and management
guidance of 0.75%. We expect an ROA of 1.6% and a standalone ROE of
13.3% for FY13F.
Catalysts: Lower loan-loss provisions and higher loan growth
Valuation: We put fair value at 1.8x adjusted book, 14.3x forward P/E
On a standalone basis, ICICI trades at 1.4x FY13F adjusted book of
INR538/share, for an ROA of 1.6% and ROE of 13.3%. Our TP of
INR1,165 values the stock at 1.8x FY13F ABV and 14.3x FY13F EPS.
Improvement all around
We upgrade ICICI Bank to BUY, with a TP of INR1,165. In our view, ICICI will be
relatively better shielded from the asset quality deterioration expected in the Indian
banking sector over the next several quarters on account of its balance sheet
consolidation during FY09-FY10. While other banks were expanding their loan books at
a rapid pace, ICICI did not take aggressive exposure to sectors where asset quality is
now suspect. The ROE (on the best capital base in the system), which was stuck in the
10-12% range, is now expected to increase to 15% (consolidated) by FY13 driven by
expanding NIM (2.9% in FY13 versus 2.7% in FY12) and decreasing LLPs, and as
capital returns from the subsidiaries.
In the following sections we address these issues:
1) Why will ICICI have better asset quality than the system, especially the PSU banks?
2) What is the change in the key operating parameters for the bank over the next two
years?
3) Is there a case for a valuation re-rating for the bank in the face of headwinds for the
banking sector?
Why will ICICI's asset quality fare better than the system?
We are upgrading ICICI Bank to Buy from Neutral, while we have a negative view on the
PSU banks. We believe ICICI's asset quality will be more robust than the system
because of the following reasons:
1) In the aftermath of the global financial crisis, ICICI consolidated / contracted its
balance sheet during FY09-10 by 17% to clean up its books of bad assets which were
acquired during a period of rapid retail loan expansion, especially unsecured retail loans.
The reduction in its riskier exposures during this period of austerity left the bank with a
seasoned loan book without the types of loans which would typically have become
delinquent now. In contrast to ICICI’s loan-book contraction, the banking system overall
expanded aggressively during FY09-FY11, with system average loan growth of 18.5%.
Having finished the consolidation, ICICI started to grow its loan book in a moderate /
prudent manner beginning 2QFY11. More importantly, if we look at the relative loan
growth rates (between ICICI Bank and the system) in sectors where GNPL formation has
been high, the contrast becomes more apparent.
In the figure below, we have highlighted ICICI Bank's loan growth in the sectors where
the banking system has experienced higher levels of NPLs. Iron & steel, textiles, gems
& jewellery and infrastructure are some of the sectors where the formation of bad loans
has been high. In each of these sectors, ICICI's loan growth has been more conservative
than the system.
A recap of 1QFY13 earnings
• ICICI Bank reported a 1QFY13 PAT of INR18.2bn, largely in line with our estimate of
INR18.9bn. The bank reported overall loan growth of 21.6%, with domestic corporate
loan growth of 28%, international loan growth of 34.6% (aided by INR depreciation) and
retail loan growth of 10.3%. NIM was stable q-q at 3.01% and asset quality was also
stable with LLPs of 72bps.
• Net interest income grew robustly (up 32% y-y), aided by stable NIM of 3.01% and
strong loan growth of 21.6%. Domestic NIMs stayed largely stable at 3.32% whereas
international NIMs expanded further by 10bps sequentially to 1.6% (0.9% in 1QFY12).
• Non-interest income growth was 13% lower than our estimate on the back of trading
loss on ICICI’s equity portfolio & security receipts and muted fee income growth (up
4.4% y-y). However, dividend income from subsidiaries remained strong as the bank
received dividends from ICICI Canada (INR1.33bn) and ICICI’s life insurance
subsidiary (INR0.75bn).
• Loan growth of 21.6% y-y (5.8% q-q) was largely contributed by a strong 15%
sequential uptick in domestic corporate and 6% growth in SME segment. Deposits grew
16% y-y; however, CASA deposits grew 12.5% y-y due to muted current account
deposit growth leading to a CASA ratio decline of 130bps y-y (290bps q-q) to 40.6%.
• Asset quality remains benign, with GNPL ratio declining 8bps sequentially to 3.54%.
Loan-loss provisions (as a % of average loans) came in at around 60bps vs. our
expectation of 64bps. The bank added INR3.5bn of net restructured loans; however,
the restructured book declined to INR 41.7bn from INR42.6bn as the bank sold down its
Kingfisher Airlines loans of INR4.3bn. Provision coverage ratio stands at 80.6%. Capital
adequacy ratio stands at a robust 18.54% with a tier-1 ratio of 12.78% (without 1QFY13
profits).
Outlook and key takeaways from management call
• Management guidance around maintaining blended NIM at 3% level appears more
confident now than in the previous quarters. Domestic NIM is expected to be stable at
the 3.3% level and international NIM in the 1.5-1.6% range.
• Delinquencies in the quarter were to the tune of INR8.68bn with LLPs of 60bps. The
bank maintained its total provision (as a % of average loans) guidance of 75bps for
FY13 as management expects standard asset provisions to increase given the growth
in the loan book. The bank doesn’t have a significant pipeline for restructuring.
• Given the ability to maintain NIM at 3%, stable asset quality and sustained expectation
of dividends from the UK and Canada banking and life insurance subsidiaries,
management has revised guidance for FY13 exit ROE to 15% from 14% guided last
quarter. ROA is expected to be 1.7% by FY14.
Valuation methodology
We arrive at our target price of INR1,165 by valuing the subsidiaries on a sum-of-theparts
basis at INR185 and using a three-stage residual-income valuation method for core
banking business that assumes the following: 1) a 12.7% CAGR for the company's
average interest-earning assets during FY12-15F, followed by a CAGR of 13.2% for
FY15-20F and a terminal growth rate of 4% beyond that; 2) average ROE of 12.3%
during FY12-20F and a 10.9% terminal value ROE; and 3) discount rates ranging from
15.7% (current cost of equity) for FY12-15F and 12.25% for FY15-20F with a 10%
terminal rate. At our target price for the core bank, ICICI would trade at 1.8x our FY13F
ABV of INR538 and 14.3x FY13F EPS of INR68.5 for an ROE of 13.3%.
Risks
Key risks to our investment thesis are negative asset-quality surprises from power and
allied sectors due to continued policy inaction and worse-than-expected corporate capex
slowdown. A large outflow of FII investment from India is another potential risk for ICICI
due to its index weighting.
No comments:
Post a Comment