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ICICI Bank
Turnaround gathering momentum; initiate with OUTPERFORM
We initiate with OUTPERFORM and price target of
Rs1,310 (Rs1,151 core business value and Rs158 value
of subsidiaries).
Our target multiple is higher than the mean multiple of
1.8x, justified in our view by rapidly improving
profitability.
Earnings turnaround at ICICI Bank likely to be much
stronger in FY12E compared to 9M FY11.
We expect RoAs to improve from 1.3% in 9M FY11 to
1.7% by FY13E, amongst the highest in the banking
sector.
NIMs better than earlier guidance – During 3Q FY11
earnings, management had guided that NIMs will decline in
4Q FY11/1Q FY12 due to the negative impact of mandatory
priority sector investments and higher cost of funds.
However, recent discussions with management indicate that
NIMs are likely to stay stable at 3Q levels in 4Q FY11 and
also in FY12E, which is a positive surprise. Pick up in
international NIMs from repricing of earlier fixed rate
international liabilities is the key reason for the change in
guidance.
Turnaround gathering momentum – After consolidating
operations and cleaning up the loan book over FY08-10,
ICICI Bank’s earnings turned around in 1Q FY11. While the
turnaround started in 1Q FY11, we believe it will gather
momentum only from 4Q FY11 with pick up in yoy loan
growth, improvement in international NIMs, pick up in fees
and continued decline in credit costs.
Valuation – ICICI Bank trades at 2.2x P/adjusted BV
FY12E at a discount to other large private banks due to
concerns on its historic loan book and historic profitability.
Risks – Faster-than-expected increase in interest rates and
regulatory changes for its overseas operations are key risks
for ICICI Bank.
Investment argument and valuation
Turnaround gathering momentum
After consolidating operations and cleaning up the loan book over FY08-10, ICICI Bank’s
earnings turned around in 1Q FY11. While the turnaround started in 1Q FY11, we believe it will
gather momentum 4Q FY11 onwards with likely pick up in yoy loan growth, turnaround in
international NIMs, pick up in fees and continued decline in credit costs. We believe the strong
turnaround in FY12E will be driven by the following factors:
The bank is likely to achieve loan growth of 20% yoy in FY12E higher than 15% yoy in 9M
FY11 with rising demand for overseas loans by Indian corporates and continued strong
demand for project finance and residential mortgages.
We expect credit cost to fall to 70bps of loans in FY12E, from 1.2% in FY11E and a high 2.2%
in FY10 as the bank has already reached the RBI mandated provisioning cover of 70% and
has also exited the small ticket personal loan segment where the incidence of NPLs is much
higher than other retail segments.
NIMs are likely to remain stable in FY12E at 2.5% (calculated) despite higher cost of funds
largely due to a good turnaround in international NIMs. Around 25% of ICICI Bank’s total loans
are from international operations where NIMs were depressed due to high cost fixed liabilities.
With the roll over of high cost fixed liabilities to lower cost borrowings international NIMs are
likely to improve to close to 2% in FY12E against 85bps in 3Q FY11.
We expect earnings to grow at a strong 32% in FY12E against 8% over FY08-11E.
Above average RoA and strong RoE progression by FY13E
Led by the strong turnaround in earnings, we expect RoA to improve to 1.5% in FY12E and
further to 1.6% in FY13E from 1.3% for 9M FY11. We also expect core RoE to improve from
12.6% in FY11E to 15.3% in FY12E and further to 16.5% in FY13E.
Valuation
Our price target of Rs1,310 for ICICI Bank comprises Rs1,151 as the value of the core business
and Rs158 for the non-bank subsidiaries. Our value for the core business is based on 2.5x
FY12E P/BV. We have used sustainable RoE of 19.7%, cost of equity of 12.6% and sustainable
growth rate of 8%. We have valued life insurance at 12x new business profit for FY12E. We have
valued other subsidiaries using relevant market benchmarks as detailed in the table below. Our
target multiple of 2.5x is lower than the previous high of 2.9x (adjusted for subsidiaries) in Jan ’08
but significantly higher than the five-year average multiple of 1.8x. In our view, the average
multiple is depressed by concerns on asset quality of corporate loans over FY00-05 and
concerns on quality of the unsecured retail loan book over FY07-09. Over FY08-10, ICICI Bankfollowed a strategy of consolidation in order to clean up the loan book. Consequently profitability
also suffered with RoA dipping to ~1% over FY07-10 from 1.2% in FY06. With historical concerns
behind us, we believe the stock should re-rate to reflect improving profitability. Our bear and bull
case analysis for ICICI Bank’s price target suggests that the stock price has more upside risks
than downside risks indicating favourable risk return for investors.
Company Profile
ICICI Bank is India's second-largest bank by assets with Rs3.9trn. It operates through a network
of 2,529 branches. The bank has a number of specialised non-banking subsidiaries including life
insurance, general insurance, asset management, venture capital and investment banking.
Management team
Managing Director and Chief Executive Officer: Chanda Kochhar
Joined the firm as a Management Trainee in 1984 and has since then held various positions in
the bank across infrastructure lending, retail finance, international operations, wholesale banking.
She has a Masters in Management Studies (Finance) from the Jamnalal Bajaj Institute of
Management Studies, Mumbai and is a Cost Accountant from the Institute of Cost and Works
Accountants of India.
Executive Director and Chief Financial Officer: N.S. Kannan
Previously was the Executive Director of ICICI Prudential Life Insurance Company. He joined the
ICICI group in 1991 and has served in various roles including project finance operations,
infrastructure financing, structured finance, and treasury operations. He is a Chartered Financial
Analyst from the Institute of Chartered Financial Analysts of India and an Honours graduate in
Mechanical Engineering. He also holds a Postgraduate in Management from the Indian Institute
of Management, Bangalore.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ICICI Bank
Turnaround gathering momentum; initiate with OUTPERFORM
We initiate with OUTPERFORM and price target of
Rs1,310 (Rs1,151 core business value and Rs158 value
of subsidiaries).
Our target multiple is higher than the mean multiple of
1.8x, justified in our view by rapidly improving
profitability.
Earnings turnaround at ICICI Bank likely to be much
stronger in FY12E compared to 9M FY11.
We expect RoAs to improve from 1.3% in 9M FY11 to
1.7% by FY13E, amongst the highest in the banking
sector.
NIMs better than earlier guidance – During 3Q FY11
earnings, management had guided that NIMs will decline in
4Q FY11/1Q FY12 due to the negative impact of mandatory
priority sector investments and higher cost of funds.
However, recent discussions with management indicate that
NIMs are likely to stay stable at 3Q levels in 4Q FY11 and
also in FY12E, which is a positive surprise. Pick up in
international NIMs from repricing of earlier fixed rate
international liabilities is the key reason for the change in
guidance.
Turnaround gathering momentum – After consolidating
operations and cleaning up the loan book over FY08-10,
ICICI Bank’s earnings turned around in 1Q FY11. While the
turnaround started in 1Q FY11, we believe it will gather
momentum only from 4Q FY11 with pick up in yoy loan
growth, improvement in international NIMs, pick up in fees
and continued decline in credit costs.
Valuation – ICICI Bank trades at 2.2x P/adjusted BV
FY12E at a discount to other large private banks due to
concerns on its historic loan book and historic profitability.
Risks – Faster-than-expected increase in interest rates and
regulatory changes for its overseas operations are key risks
for ICICI Bank.
Investment argument and valuation
Turnaround gathering momentum
After consolidating operations and cleaning up the loan book over FY08-10, ICICI Bank’s
earnings turned around in 1Q FY11. While the turnaround started in 1Q FY11, we believe it will
gather momentum 4Q FY11 onwards with likely pick up in yoy loan growth, turnaround in
international NIMs, pick up in fees and continued decline in credit costs. We believe the strong
turnaround in FY12E will be driven by the following factors:
The bank is likely to achieve loan growth of 20% yoy in FY12E higher than 15% yoy in 9M
FY11 with rising demand for overseas loans by Indian corporates and continued strong
demand for project finance and residential mortgages.
We expect credit cost to fall to 70bps of loans in FY12E, from 1.2% in FY11E and a high 2.2%
in FY10 as the bank has already reached the RBI mandated provisioning cover of 70% and
has also exited the small ticket personal loan segment where the incidence of NPLs is much
higher than other retail segments.
NIMs are likely to remain stable in FY12E at 2.5% (calculated) despite higher cost of funds
largely due to a good turnaround in international NIMs. Around 25% of ICICI Bank’s total loans
are from international operations where NIMs were depressed due to high cost fixed liabilities.
With the roll over of high cost fixed liabilities to lower cost borrowings international NIMs are
likely to improve to close to 2% in FY12E against 85bps in 3Q FY11.
We expect earnings to grow at a strong 32% in FY12E against 8% over FY08-11E.
Above average RoA and strong RoE progression by FY13E
Led by the strong turnaround in earnings, we expect RoA to improve to 1.5% in FY12E and
further to 1.6% in FY13E from 1.3% for 9M FY11. We also expect core RoE to improve from
12.6% in FY11E to 15.3% in FY12E and further to 16.5% in FY13E.
Valuation
Our price target of Rs1,310 for ICICI Bank comprises Rs1,151 as the value of the core business
and Rs158 for the non-bank subsidiaries. Our value for the core business is based on 2.5x
FY12E P/BV. We have used sustainable RoE of 19.7%, cost of equity of 12.6% and sustainable
growth rate of 8%. We have valued life insurance at 12x new business profit for FY12E. We have
valued other subsidiaries using relevant market benchmarks as detailed in the table below. Our
target multiple of 2.5x is lower than the previous high of 2.9x (adjusted for subsidiaries) in Jan ’08
but significantly higher than the five-year average multiple of 1.8x. In our view, the average
multiple is depressed by concerns on asset quality of corporate loans over FY00-05 and
concerns on quality of the unsecured retail loan book over FY07-09. Over FY08-10, ICICI Bankfollowed a strategy of consolidation in order to clean up the loan book. Consequently profitability
also suffered with RoA dipping to ~1% over FY07-10 from 1.2% in FY06. With historical concerns
behind us, we believe the stock should re-rate to reflect improving profitability. Our bear and bull
case analysis for ICICI Bank’s price target suggests that the stock price has more upside risks
than downside risks indicating favourable risk return for investors.
Company Profile
ICICI Bank is India's second-largest bank by assets with Rs3.9trn. It operates through a network
of 2,529 branches. The bank has a number of specialised non-banking subsidiaries including life
insurance, general insurance, asset management, venture capital and investment banking.
Management team
Managing Director and Chief Executive Officer: Chanda Kochhar
Joined the firm as a Management Trainee in 1984 and has since then held various positions in
the bank across infrastructure lending, retail finance, international operations, wholesale banking.
She has a Masters in Management Studies (Finance) from the Jamnalal Bajaj Institute of
Management Studies, Mumbai and is a Cost Accountant from the Institute of Cost and Works
Accountants of India.
Executive Director and Chief Financial Officer: N.S. Kannan
Previously was the Executive Director of ICICI Prudential Life Insurance Company. He joined the
ICICI group in 1991 and has served in various roles including project finance operations,
infrastructure financing, structured finance, and treasury operations. He is a Chartered Financial
Analyst from the Institute of Chartered Financial Analysts of India and an Honours graduate in
Mechanical Engineering. He also holds a Postgraduate in Management from the Indian Institute
of Management, Bangalore.
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