ICICI Bank: Buy:: Business Line

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Investors can consider buying the shares of ICICI Bank, the largest private sector bank in the country. Pursuing a strategy of measured quality growth has paid off well for the bank in the current environment when asset quality of banks has been a concern.

At the current market price of Rs 1,056, ICICI Bank’s core banking business trades at 1.35 times FY 2014 adjusted book value (ABV). This is at a discount to its historical average of 1.8 times one year forward ABV. Valuing the core business at 1.8 times FY 2014 adjusted book value, and subsidiaries at Rs 250 per share, we arrive at a target price of Rs 1,357.

ICICI Bank has one of the highest core Tier-I capital adequacy ratio of 13.3 per cent (as of quarter ending December). It is also well-poised to meet stringent Basel III norms.

The bank’s overseas subsidiaries also have excess capital — for instance, capital adequacy of ICICI Bank UK is at 31.5 per cent and that of ICICI Bank Canada is at 34.5 per cent. This gives the bank sufficient capital cushion to grow business and improve returns.

The bank has been able to increase its return on assets (ROA) from 1.1 per cent in FY 2010 to 1.4 per cent in FY 2012, and continues to improve profitability. The bank’s ROA stood at 1.7 per cent in the quarter ending December — a level which is expected to sustain in FY 2014.

We expect ICICI Bank to grow earnings at 17 per cent over FY 2014 on the back of a healthy deposit mix, stable net interest margins and steady loan growth.

HEALTHY DEPOSIT MIX

The bank significantly altered its deposit mix in FY 2010 which resulted in its low-cost current account savings account (CASA) ratio improving from 29 per cent in FY 2009 to 42 per cent.

The CASA ratio continues to remain healthy at 40.9 per cent as of December 2012.

The bank has expanded its branch network over the past three years from around 1,741 branches in March 2010 to about 2,895 as of December 2012 (aided by the acquisition of Bank of Rajasthan).

While branch expansion has aided ICICI Bank improve its CASA deposits, there seems to be more room for growing volumes by leveraging the wide branch network.

The CASA per branch for ICICI declined to Rs 40 crore, as of December 2012, compared with Rs 49 crore in March 2010 — primarily due to new branches. HDFC Bank’s current CASA per branch is Rs 46 crore. An improvement in CASA volumes will aid profitability.

STABLE LOAN GROWTH

As on December 2012, the bank’s loan book was higher by 16.5 per cent year-on-year. Retail loans accounted for 34 per cent of the portfolio.

The growth in the retail loan book for the quarter was a healthy 17.2 per cent, driven by housing loans that grew 18.6 per cent. Domestic corporate and SME segment accounted for 34 per cent of the December 2012 loan book.

The corporate loan book grew by a strong 26.6 per cent growth in December quarter on the back of increased working-capital loans, and project loans disbursement from existing sanctions.

The bank’s loan growth grew by 17 per cent in FY 2012, and we expect the growth to remain stable at this level led by retail loans, working-capital funding in the corporate segment and the increased disbursements from past sanctions.

With higher share of low-cost CASA deposits and stable loan book growth, the bank has been able to improve its net interest margins from 2.5 per cent in FY 2010 to 3.1 per cent as of December 2012. As the bank maintains its strategy of focussing on profitability rather than balance-sheet growth, we expect the margins to stabilise at current levels.

STEADY ASSET QUALITY

ICICI Bank’s asset quality has been improving steadily.

Its net non-performing assets in the December quarter were at 0.64 per cent compared with 0.66 per cent in the preceding quarter and 0.7 per cent during the previous year.

The bank’s restructured assets have remained fairly stable over the nine months ending December 2012, in fact lower than the levels seen in March 2012.

The overall improvement in asset quality has led to a decline in provisioning costs from 1.2 per cent in FY 2010 to 0.3 per cent in the December 2012 quarter. With continued focus on credit quality, we expect lower provisioning costs to aid earnings momentum.

Risks to our recommendation include a sharp weakness in the economic environment which may depress loan growth and impact asset quality.