ICICI Bank : 2QFY11 – oh, happy day :HSBC

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ICICI Bank (ICICIBC)
OW: 2QFY11 – oh, happy day
 ICBK’s credit costs at 3-year low and tax break on BoR
merger surprise the Street positively; stock up 7%
 Retail book decline stemmed – growth on the horizon;
strong CASA and margin performance help 10% sequential
growth in core revenues
 Reiterate OW, raise target price to INR1,350 from INR1,110
implying a potential return of 17%





2QFY11 earnings surprised us positively partly because of 10% lower than expected
credit costs and partly because of a tax break on inheriting the BoR book, excluding which
the surprise factor would have been 5%.
Valuations and stock catalyst: The stock trades at 24x PE and 2.3x PB on a 12m
forward basis. However, excluding about 18% of its market capitalisation accounted for
by subsidiary values, it trades at 19.7x PE and 1.8x PB. We see continuing momentum on
loan growth acceleration and lower credit costs aided by 8% YTD underperformance to
the Bankex helping the stock to appreciate (details of our target price below).
Operational review: With retail loan disbursements now outstripping repayments, the
loan book shows clear signs of double-digit growth helped by domestic wholesale loans
growing smartly at 28% from project finance drawdowns. Margins moved up 10bps q/q
and are likely to remain firm driven by high CASA of 44%. NPL ratios (including retail)
have started tapering and additions to NPLs were driven by the BoR merger. Accordingly,
credit costs have reached a 3-year low given the scrubbed-clean loan book.
Earnings outlook: Both top line growth as well as lower provisions are likely to drive 20-
25% earnings growth up to FY13E as ROA expands to 1.5%. We increase our earlier
estimates by 5% and 7.7% for FY11E and 12E respectively, mainly on the back of the
lower provision surprise.
Valuations and target price: We continue to value ICICI Bank using a weighted average
combination of PE, PB, and economic profit model (EPM) methodologies. However, we
now use 24m forward EPS and BVPS to set our 12m forward target price. Accordingly,
we apply a 10% discount to our erstwhile target multiples given lower visibility of the
same, with PE multiple at 23x and PB at 2.2x. Accordingly, we arrive at a 12-month target
price of INR1,350 implying a potential return (including dividends) of 17%. We retain our
Overweight rating on the stock.
Key risks: (1) Slowing loan growth momentum; (2) spike in NPLs