Buy ICICI Bank- Motilal oswal,

Set for the next leap
Expect earnings CAGR of 23%+; Rising RoEs to drive more re-rating
 ICICI Bank (ICICIBC) is expected to deliver EPS CAGR of 23%+ over FY12-15E, on a higher
base of 25%+ over FY10-12, driving up the core RoE from ~10% in FY10 to 17%+ in
FY15E. Importantly, the Tier 1 would remain strong at 10%+ at end-FY15.
 With a market share of 4.2% in the domestic loans and largest branch network in the
private financials, above industry growth and favorable margins will drive earnings.
 ICICIBC has managed the asset quality well during the last 18 months of pain in the
Indian economy. While FY14 will be critical to see the fate of few large exposures, the
bank is confident of tiding over this without any dent on its profitability. Recovery in
Indian economy / corporate capex will be viewed positive for ICICIBC.
 Valuations for ICICIBC will evolve as it delivers RoE improvement over the next 2 years
(to come at the near sector averages). Importantly, it will have scope to further boost
its leverage as capital may get boost from return of capital by key subsidiaries.

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Subsidiaries transform from being guzzlers to capital providers to parent
ICICIBC has not infused any capital in its subsidiaries for the past three years.
Corrective measures and consolidation has led to significant CRAR improvement
for ICICI UK and ICICI Canada. Presently, most of the bank's subsidiaries have
become self-sufficient. In the medium term, listing of life insurance business
[capital support of INR49b (our estimate) under Basel III] and repatriation of
capital from international subsidiaries will reduce capital charge ensuring
dilution-free growth.
Core operations improve decisively, core RoE to reach 17%+ by FY15E
ICICIBC's risk adjusted margins (RAM) have improved sharply from a low of 1% in
FY10 to 2.2% in FY12, led by a 95bp fall in credit cost and 25bp by margins
improvement. Despite lower growth in fee income, continuous margin
improvement (~50bp over FY12-15) and strong asset quality performance will
translate into strong RoA's of ~1.7% and core RoE is expected to improve to 17%+.
Significant improvement in asset quality in challenging times
Even in challenging times, ICICIBC exhibited strong performance in asset quality,
with GNPA percentage declining over the past 10 quarters and provision coverage
ratio increasing from 53% in FY09 to 79% in 1HFY13. With retail delinquencies at
its historic lows credit cost estimates of average 70bp over FY13E-15E, compared
to 40bp in FY12, is conservative and factors the higher stress in corporate portfolio
leaving lower downside risk to our estimates.
Structural changes to ensure higher return ratios; valuation attractive
Return ratios are on an upward trajectory and structurally core operations of
ICICIBC has improved significantly, which would enable it to sustain the ratios.
Further unlocking of value from subsidiaries could lead to re-rating of the stock.
ICICIBC trades at near five-year average valuation, which is unwarranted
considering expected improvement in growth and RoE. Maintain Buy.