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ICICI Bank
3Q earnings in-line; Reiterate Buy and PO
„3Q11: Earnings in-line; +5-6% ahead of street; growth back
ICICI Bank reported earnings of Rs14.4bn, a +30% yoy growth (in-line), but +5-
6% ahead of street. Topline (in-line) grew +12% yoy, with rebound in growth (loan
growth at +15% yoy) and margins sustaining at 2.6%. Further, CASA grew 20bps
qoq to 44.2% (avg. CASA up +100bps qoq) as recently expanded distribution
aided CASA growth. Fees grew 14% yoy, a disappointment, driven by lower retail
fees, while opex was +2-3% ahead of estimates driven by full impact of BoR
merger and costs due to new branch additions. No NPL accretion (at I-Bk level).
ROA set to rise to +1.6% by FY12; core ROE to +15.5%
We have marginally tweaked earnings (<1%) to factor in marginally lower fees
and higher opex, partly offset by sharply lower provisions. More importantly, the
quality of earnings is likely to be much better supported by the much topline driven
by margins rising (re-pricing of loans with a lag as ICICI Bk has re-set clauses at
set dates vs. most govt. banks, which where a change in lending rate triggers
change in borrowing cost for the borrower) and asset quality improvement
sustaining. Earnings to grow by +30/25% in FY12/13; Core ROA rising to +1.6%.
Reiterate Buy and maintain PO
We reiterate our Buy as seen in 3Q earnings, the quality of earnings continues to
shown an improvement qoq. We maintain our PO, despite macro headwinds, as
we believe the bank trading at 2.2-2.3x FY12 (bk. biz.) can trade up to +2.5-2.6x
led by earnings trajectory of +30% (topline) and a sharp unwinding of credit costs,
especially where most banks asset quality continues to see-saw. Add to this subs
(non-bank) value of Rs237/shr, we get out PO of Rs1400.
3Q11: Earnings in-line; +5-6% ahead of street
3QFY11 earnings of Rs14.4bn (up +30% yoy; in-line) were almost +5-6% ahead
of consensus and driven by a +12% topline growth (in-line) supported by rebound
in growth (volumes) and margins being maintained. Also, there was a sharp
(50%) lower than estimated provisions, as asset quality held-up.
Topline supported by +15% loan growth and margins flat yoy and qoq at 2.6%.
CASA rose to +44.2% (daily average CASA up +100bps qoq to +40%) up 20bps
qoq) with the bank successfully leveraging its expanding distribution. Margins in
domestic business are at 300bps but international loan book, which is ~ 24% of
its loan book, has margins of 85bps. Positively, as on today, ICICI Bk is earnings
a margin of +140-150bps on its international book.
Further, loans grew by ~6% qoq vs. 2% in 2Q. Core fees were up 14% yoy a tad
disappointment as growth in retail fees (credit cards and 3 party distribution)
remained challenged.
Opex was up 26% yoy and was 2% ahead of estimates driven by full impact of
BoR merger and impact of recently added branch distribution.
Asset quality was also very comfortable with no NPL accretion (at bank level).
Gross NPLs flat qoq and net NPL’s at 1.4%, down 9% qoq in absolute terms.
Close to 65% of gross NPLs continue to be from retail. Provision coverage is at
~72%. Fresh restructuring at Rs6bn but offset by upgradation / recoveries /
closure, hence the net impact is flat restructured book at Rs25bn.
As highlighted earlier, the bank has delivered on all “4C’s: with the difference being
that the bank is now looking at leveraging capital vs. preserving capital earlier.
International Subsidiaries
UK subsidiary
„ UK sub reported a net profit of US$10.9mn vs. (US$8.4mn in 2Q and
US$9mn in 1QFY11). The CAR stands at +21%. Net MTM write-back of
Rs1.9mn in reserves in 9MFY11.
„ Total Assets of UK subsidiary were at US$7.0bn (US$7.2bn in 2QFY11),
deposits were 65% of total liabilities, 51% of which are term deposits for
period ranging from 12-18 months. Proportion of retail term deposits in total
deposits at 75%.
„ Of total assets of US$7.0bn, 57% are loans and advances to customers
(80% Indian corporate); 4% are India-linked investments; 16.5% is cash and
liquid investments; <2% is asset-backed investments and 16% is bonds of
financial inst. along with ~5% of other assets.
Canada Subsidiary
„ Canada subsidiary asset book stands at CAD$4.7bn (CAD$5.0bn in
2QFY11), with deposits at 75% (60% term deposits). Of the assets, 66% are
loans (80% to Indian corporate), 15% in cash and liquid securities, 7%
federally insured mortgages, <3% India linked investments, <2% assetbacked securities, and the balance other assets.
„ Net profit of Canada arm is at CAD$10.7mn in 3QFY11 (CAD$7.6mn in
2QFY11). CAR of Canada arm is at +26%.
Eurasia Subsidiary
„ Total assets of US$367mn (US$274mn in 2QFY11) of which 48% (66% in
2Q) are loans and 46% cash and liquid securities (includes balanced with
banks and central banks). Capital adequacy of 32% as on 3QFY11.
Other subs. - (Insurance, AMC etc)
„ Life insurance biz. saw a profit of Rs5.1bn in 9MFY11 vs. a loss of Rs1bn in
9MFY10, including surplus from non-participating policyholder’s funds.
Excluding this impact, the profit at company level was Rs1.3bn for 9MFY11.
I-Pru’s APE (new biz.) has seen a growth of 14% yoy in YTD. NBP margins
at 18.7% vs. 18.9% in 2QFY11 and 19.2% in 1QFY11.
„ General insurance too reported a profit of Rs700mn in 3QFY11 vs. Rs1.0bn
in 2QFY11 vs. Rs330mn in 1QFY11.The conscious strategy of underwriting
profitable business and general slowdown resulted in higher profits. ICICI
continued to be a market leader in private sector. Premium income has
grown +30% yoy.
„ The asset management biz. after regulatory changes has seen lower profits
of Rs0.06bn vs. Rs0.14bn in 2QFY11 vs. Rs0.32bn in 1QFY11 on a/c of
higher marketing expenses.
„ ICICI Securities and PD’s profit after tax for 3QFY11 was Rs0.39bn vs.
Rs0.27bn in 2QFY11 and 1QFY11 at Rs0.25bn.
„ Housing finance total assets at Rs94bn are down from 101bn in 2Q and
Rs113bn in 1QFY11. 95% are mortgage loans funded by mix of borrowings
(60%) and deposits (28%). CAR at +20% and net NPLs at 1.4%
Tweak earnings by ~1%; growth at +30/25%
We have marginally tweaked earnings (~1%) to factor in marginally lower fees
and higher opex, partly offset by sharply lower provisions. More importantly, the
quality of earnings is likely to be much better supported by the much topline
driven by margins rising and asset quality improvement sustaining. We estimate
earnings to grow by +30/25% in FY12/13 on back of earnings growth of ~32% in
FY11.
Key assumptions driving operating earnings
We discuss below the key drivers for our future earnings and overall outlook.
Loan growth to pick up on domestic capex /infra; mortgage; vehicles
We now estimate +20-21% loan growth partly led by retail growth (mortgage and
vehicle) and BoR adding to the b/s. Further, we continue to see the domestic
corporate loan book expanding at more rapid pace of +60% in FY11 (growth of
57% yoy in 3QFY11), led by infrastructure and project finance. The overseas loan
book is likely to see a +13-14% growth.
Margins to expand by ~30bps through FY10-12; avg. CASA at +42%
Margin expansion is likely to sustain in FY12 supported by overall pick up in
lending, per se. Margins should also expand in FY12 for ICICI Bank as loans reprice with a lag as ICICI BK has re-set clauses at set dates (spread over the year)
vs. most govt. banks, which where a change in lending rate triggers change in
borrowing cost for the borrower.
Further, the bank should also see its savings deposit franchise expanding as it
leverages its expanded distribution. The expanded branch distribution would help
the bank raise the level of savings deposits that is likely to grow by +20% through
FY11-12 (30% growth in FY10). Margins forecast to expand to ~2.6% in FY11
and +2.8% in FY12 from 2.5% in FY10.
Fee revenues to get fillip with pick up in lending; branch expansion
Fee revenues should potentially see a much stronger rebound in FY12 (leaving
room for upside) as loan growth picks up and we see pick up in equity linked
products (mutual funds and insurance).
Fee revenues should also benefit from the banks’ expanding branch distribution.
The bank has increased its branch network by a third between Jun’09 v/s Dec’10.
Total branches at +2500 in Dec’10. This should help sustain a high level of
savings deposits and customer acquisition. Expanding customer base should
positively impact both the saving deposit franchise and also retail fees and asset
cross sell.
Maintain SOTP at Rs237/shr.
ICICI Pru Life’s growth to date (APE) has been +14%. Moreover, NBP margins
have also held-up at 18.7% (down from 18.9% in 2Q). We remain positive on
ICICI Bank’s life insurance biz. prospects as we believe players like SBI are in a
very strong position on economies of scale, already reporting profits, and
adopting a bancassurance model, which will give itself an edge vis-à-vis other
players in this uncertain scenario. We believe life business can command 1x EV
(FY10) and 8x NBAP multiples, in-line with peers.
Core RoE to expand to ~15.5% by FY12
ICICI Bank’s reported RoEs is forecast to rise to at ~10% by FY11 and +12.5% by
FY12. But the RoE is depressed owing to capital infusion of almost +US$2.5bn in
its various ventures on which earn minimal today, creating a drag on its ROE.
The adjusted core ROE (if we just look at the profit made from the capital
deployed in the banking entity) is likely to rise to ~13% by FY11 and further to
~15.5% by FY12 vs. <10.6% in FY10.
Stock can trade +2.5-2.6x FY12 banking book
The stock is trading at +2.2-2.3x FY11 “core adj.” book (banking book) which is
after deducting value of the entire NPL’s and investments in its non-bank subs.
This, in our view, is the closest comparison to other private sector banks such as
HDFC Bank that trades at 3.4x book with ~20% RoE’s. While ICICI Bank may
continue to trade at some discount as it needs to “deliver” on some of the key
variables, the results have helped reinforce our views that the bank can deliver
across these variables.
We maintain our PO, despite macro headwinds, as we believe the bank trading at
2.2-2.3x FY12 (bk. biz.) can trade up to +2.5x led by earnings trajectory of +30%
(topline) and a sharp unwinding of credit costs, especially where most banks
asset quality continues to see-saw. Add to this subs (non-bank) value of
Rs237/shr, we get our PO of Rs1400.
Price objective basis & risk
ICICI Bank (ICIJF / IBN)
We set our PO at Rs1400. ICICI Bank appears amongst the better positioned
banks to both capitalize on growth and best positoned in terms of asset quality.
We believe the bank trading at 2.2-2.3x FY12 (bk. biz.) can trade up to +2.5-2.6x,
which is a premium to theoritical multiples, led by earnings trajectory of +30%
(topline) and a sharp unwinding of credit costs, especially where most banks
asset quality continues to see-saw. Add to this subs (non-bank) value of
Rs237/shr, we get out PO of Rs1400. Risks are sharp rise in interest rates could
hurt margins (40% of total deosits wholesale for ICICI Bank) and slowdown in
macro growth could lead to lower volume growth and earnings trajectory for
FY12.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank
3Q earnings in-line; Reiterate Buy and PO
„3Q11: Earnings in-line; +5-6% ahead of street; growth back
ICICI Bank reported earnings of Rs14.4bn, a +30% yoy growth (in-line), but +5-
6% ahead of street. Topline (in-line) grew +12% yoy, with rebound in growth (loan
growth at +15% yoy) and margins sustaining at 2.6%. Further, CASA grew 20bps
qoq to 44.2% (avg. CASA up +100bps qoq) as recently expanded distribution
aided CASA growth. Fees grew 14% yoy, a disappointment, driven by lower retail
fees, while opex was +2-3% ahead of estimates driven by full impact of BoR
merger and costs due to new branch additions. No NPL accretion (at I-Bk level).
ROA set to rise to +1.6% by FY12; core ROE to +15.5%
We have marginally tweaked earnings (<1%) to factor in marginally lower fees
and higher opex, partly offset by sharply lower provisions. More importantly, the
quality of earnings is likely to be much better supported by the much topline driven
by margins rising (re-pricing of loans with a lag as ICICI Bk has re-set clauses at
set dates vs. most govt. banks, which where a change in lending rate triggers
change in borrowing cost for the borrower) and asset quality improvement
sustaining. Earnings to grow by +30/25% in FY12/13; Core ROA rising to +1.6%.
Reiterate Buy and maintain PO
We reiterate our Buy as seen in 3Q earnings, the quality of earnings continues to
shown an improvement qoq. We maintain our PO, despite macro headwinds, as
we believe the bank trading at 2.2-2.3x FY12 (bk. biz.) can trade up to +2.5-2.6x
led by earnings trajectory of +30% (topline) and a sharp unwinding of credit costs,
especially where most banks asset quality continues to see-saw. Add to this subs
(non-bank) value of Rs237/shr, we get out PO of Rs1400.
3Q11: Earnings in-line; +5-6% ahead of street
3QFY11 earnings of Rs14.4bn (up +30% yoy; in-line) were almost +5-6% ahead
of consensus and driven by a +12% topline growth (in-line) supported by rebound
in growth (volumes) and margins being maintained. Also, there was a sharp
(50%) lower than estimated provisions, as asset quality held-up.
Topline supported by +15% loan growth and margins flat yoy and qoq at 2.6%.
CASA rose to +44.2% (daily average CASA up +100bps qoq to +40%) up 20bps
qoq) with the bank successfully leveraging its expanding distribution. Margins in
domestic business are at 300bps but international loan book, which is ~ 24% of
its loan book, has margins of 85bps. Positively, as on today, ICICI Bk is earnings
a margin of +140-150bps on its international book.
Further, loans grew by ~6% qoq vs. 2% in 2Q. Core fees were up 14% yoy a tad
disappointment as growth in retail fees (credit cards and 3 party distribution)
remained challenged.
Opex was up 26% yoy and was 2% ahead of estimates driven by full impact of
BoR merger and impact of recently added branch distribution.
Asset quality was also very comfortable with no NPL accretion (at bank level).
Gross NPLs flat qoq and net NPL’s at 1.4%, down 9% qoq in absolute terms.
Close to 65% of gross NPLs continue to be from retail. Provision coverage is at
~72%. Fresh restructuring at Rs6bn but offset by upgradation / recoveries /
closure, hence the net impact is flat restructured book at Rs25bn.
As highlighted earlier, the bank has delivered on all “4C’s: with the difference being
that the bank is now looking at leveraging capital vs. preserving capital earlier.
International Subsidiaries
UK subsidiary
„ UK sub reported a net profit of US$10.9mn vs. (US$8.4mn in 2Q and
US$9mn in 1QFY11). The CAR stands at +21%. Net MTM write-back of
Rs1.9mn in reserves in 9MFY11.
„ Total Assets of UK subsidiary were at US$7.0bn (US$7.2bn in 2QFY11),
deposits were 65% of total liabilities, 51% of which are term deposits for
period ranging from 12-18 months. Proportion of retail term deposits in total
deposits at 75%.
„ Of total assets of US$7.0bn, 57% are loans and advances to customers
(80% Indian corporate); 4% are India-linked investments; 16.5% is cash and
liquid investments; <2% is asset-backed investments and 16% is bonds of
financial inst. along with ~5% of other assets.
Canada Subsidiary
„ Canada subsidiary asset book stands at CAD$4.7bn (CAD$5.0bn in
2QFY11), with deposits at 75% (60% term deposits). Of the assets, 66% are
loans (80% to Indian corporate), 15% in cash and liquid securities, 7%
federally insured mortgages, <3% India linked investments, <2% assetbacked securities, and the balance other assets.
„ Net profit of Canada arm is at CAD$10.7mn in 3QFY11 (CAD$7.6mn in
2QFY11). CAR of Canada arm is at +26%.
Eurasia Subsidiary
„ Total assets of US$367mn (US$274mn in 2QFY11) of which 48% (66% in
2Q) are loans and 46% cash and liquid securities (includes balanced with
banks and central banks). Capital adequacy of 32% as on 3QFY11.
Other subs. - (Insurance, AMC etc)
„ Life insurance biz. saw a profit of Rs5.1bn in 9MFY11 vs. a loss of Rs1bn in
9MFY10, including surplus from non-participating policyholder’s funds.
Excluding this impact, the profit at company level was Rs1.3bn for 9MFY11.
I-Pru’s APE (new biz.) has seen a growth of 14% yoy in YTD. NBP margins
at 18.7% vs. 18.9% in 2QFY11 and 19.2% in 1QFY11.
„ General insurance too reported a profit of Rs700mn in 3QFY11 vs. Rs1.0bn
in 2QFY11 vs. Rs330mn in 1QFY11.The conscious strategy of underwriting
profitable business and general slowdown resulted in higher profits. ICICI
continued to be a market leader in private sector. Premium income has
grown +30% yoy.
„ The asset management biz. after regulatory changes has seen lower profits
of Rs0.06bn vs. Rs0.14bn in 2QFY11 vs. Rs0.32bn in 1QFY11 on a/c of
higher marketing expenses.
„ ICICI Securities and PD’s profit after tax for 3QFY11 was Rs0.39bn vs.
Rs0.27bn in 2QFY11 and 1QFY11 at Rs0.25bn.
„ Housing finance total assets at Rs94bn are down from 101bn in 2Q and
Rs113bn in 1QFY11. 95% are mortgage loans funded by mix of borrowings
(60%) and deposits (28%). CAR at +20% and net NPLs at 1.4%
Tweak earnings by ~1%; growth at +30/25%
We have marginally tweaked earnings (~1%) to factor in marginally lower fees
and higher opex, partly offset by sharply lower provisions. More importantly, the
quality of earnings is likely to be much better supported by the much topline
driven by margins rising and asset quality improvement sustaining. We estimate
earnings to grow by +30/25% in FY12/13 on back of earnings growth of ~32% in
FY11.
Key assumptions driving operating earnings
We discuss below the key drivers for our future earnings and overall outlook.
Loan growth to pick up on domestic capex /infra; mortgage; vehicles
We now estimate +20-21% loan growth partly led by retail growth (mortgage and
vehicle) and BoR adding to the b/s. Further, we continue to see the domestic
corporate loan book expanding at more rapid pace of +60% in FY11 (growth of
57% yoy in 3QFY11), led by infrastructure and project finance. The overseas loan
book is likely to see a +13-14% growth.
Margins to expand by ~30bps through FY10-12; avg. CASA at +42%
Margin expansion is likely to sustain in FY12 supported by overall pick up in
lending, per se. Margins should also expand in FY12 for ICICI Bank as loans reprice with a lag as ICICI BK has re-set clauses at set dates (spread over the year)
vs. most govt. banks, which where a change in lending rate triggers change in
borrowing cost for the borrower.
Further, the bank should also see its savings deposit franchise expanding as it
leverages its expanded distribution. The expanded branch distribution would help
the bank raise the level of savings deposits that is likely to grow by +20% through
FY11-12 (30% growth in FY10). Margins forecast to expand to ~2.6% in FY11
and +2.8% in FY12 from 2.5% in FY10.
Fee revenues to get fillip with pick up in lending; branch expansion
Fee revenues should potentially see a much stronger rebound in FY12 (leaving
room for upside) as loan growth picks up and we see pick up in equity linked
products (mutual funds and insurance).
Fee revenues should also benefit from the banks’ expanding branch distribution.
The bank has increased its branch network by a third between Jun’09 v/s Dec’10.
Total branches at +2500 in Dec’10. This should help sustain a high level of
savings deposits and customer acquisition. Expanding customer base should
positively impact both the saving deposit franchise and also retail fees and asset
cross sell.
Maintain SOTP at Rs237/shr.
ICICI Pru Life’s growth to date (APE) has been +14%. Moreover, NBP margins
have also held-up at 18.7% (down from 18.9% in 2Q). We remain positive on
ICICI Bank’s life insurance biz. prospects as we believe players like SBI are in a
very strong position on economies of scale, already reporting profits, and
adopting a bancassurance model, which will give itself an edge vis-à-vis other
players in this uncertain scenario. We believe life business can command 1x EV
(FY10) and 8x NBAP multiples, in-line with peers.
Core RoE to expand to ~15.5% by FY12
ICICI Bank’s reported RoEs is forecast to rise to at ~10% by FY11 and +12.5% by
FY12. But the RoE is depressed owing to capital infusion of almost +US$2.5bn in
its various ventures on which earn minimal today, creating a drag on its ROE.
The adjusted core ROE (if we just look at the profit made from the capital
deployed in the banking entity) is likely to rise to ~13% by FY11 and further to
~15.5% by FY12 vs. <10.6% in FY10.
Stock can trade +2.5-2.6x FY12 banking book
The stock is trading at +2.2-2.3x FY11 “core adj.” book (banking book) which is
after deducting value of the entire NPL’s and investments in its non-bank subs.
This, in our view, is the closest comparison to other private sector banks such as
HDFC Bank that trades at 3.4x book with ~20% RoE’s. While ICICI Bank may
continue to trade at some discount as it needs to “deliver” on some of the key
variables, the results have helped reinforce our views that the bank can deliver
across these variables.
We maintain our PO, despite macro headwinds, as we believe the bank trading at
2.2-2.3x FY12 (bk. biz.) can trade up to +2.5x led by earnings trajectory of +30%
(topline) and a sharp unwinding of credit costs, especially where most banks
asset quality continues to see-saw. Add to this subs (non-bank) value of
Rs237/shr, we get our PO of Rs1400.
Price objective basis & risk
ICICI Bank (ICIJF / IBN)
We set our PO at Rs1400. ICICI Bank appears amongst the better positioned
banks to both capitalize on growth and best positoned in terms of asset quality.
We believe the bank trading at 2.2-2.3x FY12 (bk. biz.) can trade up to +2.5-2.6x,
which is a premium to theoritical multiples, led by earnings trajectory of +30%
(topline) and a sharp unwinding of credit costs, especially where most banks
asset quality continues to see-saw. Add to this subs (non-bank) value of
Rs237/shr, we get out PO of Rs1400. Risks are sharp rise in interest rates could
hurt margins (40% of total deosits wholesale for ICICI Bank) and slowdown in
macro growth could lead to lower volume growth and earnings trajectory for
FY12.
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