Trend in deposit maturity profile

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1 COMPANY UPDATE Saday Sinha ICICI BANK PRICE: RS.1571 RECOMMENDATION: BUY TARGET PRICE: RS.1821 FY16E P/E: 13.5X, P/ABV: 2.1X ICICI bank has continued to demonstrate its prowess in improving ALM, asset quality, funding mix along with conserving capital. Its favorable ALM would support healthy margin which in-turn aid in robust core performance. Its asset quality pressure to ease, we expect fear of exposure to highly leveraged entities to abate as many corporate continue to deleverage through asset sale or fresh equity issuances. We believe incremental stress built-up which peaked during FY14 is likely to be lower during FY15. Stock trades reasonable (1.7x FY16E ABV) post stripping the value for subsidiaries. We believe management focus on stable growth with improving structural profitability would continue and hence, we reiterate BUY on the stock with revised TP of Rs.1821 (Rs.1660 earlier) using SOTP method, where the value of its standalone business comes to Rs.1501 (2.0x FY16E ABV) and the value of subsidiaries at Rs.320 (holding company discount: 20% to the fair value of its subsidiaries at Rs.400). Healthy NIM to aid in robust core performance; favorable ALM bodes well for the stock during downward trending interest rate cycle. We expect ICICI bank's NII to grow 16.2% CAGR during FY14-16E as compared to 14.5% CAGR reported during FY09-14 mainly aided by healthy margin expansion. Over the years, strong liability franchise has helped ICICI bank to contain its funding costs. Even during previous quarter (Q1FY15), cost of funds declined to 6.19% (11bps YoY) while yield on asset remained stable YoY, resulting into 13bps of NIM (3.40% in Q1FY15). We believe with favorable ALM (share of deposits in <1 Yr bucket stands at 36.9%, while share of advances in the same bucket stands at 26.3% in FY14), ICICI bank is likely to report healthy NIM (3.35%/3.41% in FY15/16E) during downward trending interest rate cycle. Trend in deposit maturity profile Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

2 Trend in advances maturity profile Liability franchise is likely to remain one of the best in the industry; healthy organic growth in retail segment is likely to continue in near term. We believe leadership in technology innovation is likely to support new customer acquisition as well as getting larger wallet-share from the existing customers. Its liability franchise is likely to remain one of the best in the industry supported by growing customer base. ICICI bank has consistently demonstrated its prowess in sustaining/improving CASA share during previous several quarters, when banking system as a whole was witnessing migration away from low cost deposits. Trend in Deposit growth Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Deposits (bn) 2, , , , , , , , ,357.7 Saving deposits ,027.4 Current deposits CASA 1, , , , , , , , ,444.1 Term deposits 1, , , , , , , , ,913.5 CASA (%) 40.6% 40.7% 40.9% 41.9% 43.2% 43.3% 43.3% 42.9% 43.0% We are of the view that ICICI bank with strong capitalization (CAR at 17%) and healthy traction in CASA deposits, would support 18-19% growth in domestic loan book. In near-term, we expect healthy organic growth in retail segment is likely to continue, while SME and domestic corporate books are likely to witness calibrated growth. During recent quarters, strong retail asset disbursements has aided in improving the share of retail business while domestic corporate and SME segments have seen secular decline. Strong growth in retail portfolio has been largely contributed by housing, auto and PL segments while management has continued with the calibrated strategy on CV portfolio which continued to decline on back of run-down of bought loan portfolio. Break-up of advances (New Classification) (%) Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Retail Business Domestic Corporate (includes builder finance) SME Overseas Branches Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3

3 Trend in retail loan book (Rs bn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Total retai advances Vehicle Loans Auto CV Housing Business Banking PL Credit Cards Others The management has maintained its guidance of growing domestic loan book by few percentages ( bps) higher than the system on back of strong growth in retail book. They also indicated that domestic corporate book as well as overseas book is likely to witness calibrated approach, going forward, in the prevailing adverse macro environment. Asset quality pressure to ease; management's reiterated guidance of lower impairment during FY15 provides comfort. Street has been apprehensive about the ICICI's exposure to highly leveraged entities. However, we expect this fear to abate as many corporate continue to deleverage through asset sale or fresh equity issuances. We believe incremental stress built-up which peaked during FY14 is likely to be lower during FY15. During Q1FY15, we saw fresh loan impairment (gross slippage + new restructuring) coming at lower level (Rs.25.9 bn; 3.1% annualized) as against the run rate of Rs bn seen during previous two quarters. Gross slippage during past few quarters has come primarily from SME as well as mid-size corporate segments. Trends in NPAs (Rs bn) Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Gross NPAs Gross NPAs (%) 2.76% 2.68% 2.66% 2.56% 2.69% Net NPAs Net NPAs (%) 0.69% 0.73% 0.81% 0.82% 0.87% Cumulative Provisions Outstanding Std assets provisions Provision Coverage Ratio (%) 75.4% 73.1% 70.0% 68.6% 68.4% Movement of NPA (Rs Bn) Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Opening balance Slippage Upgrade + Recovery W/O & sale Closing balance Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4

4 Its outstanding restructured book stands comfortable at Rs bn (3.2% of advances) vis-à-vis industry average with relatively thin restructuring pipeline (Rs.15 bn as on Q1FY15). The share of retail portfolio in GNPA has fallen from 54% in Q1FY14 to 34% in Q1FY15, on back of fresh delinquencies coming primarily from SMEs and mid corporate. Trends in NPLs Rs. Bn Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Retail - Gross NPA Corporate - Gross NPA Retail - Net NPA Corporate - Net NPA ICICI bank has been performing better on the credit costs front - during Q1FY15, credit cost came at ~86bps, marginally better than the management full year guidance of 90bps (FY15), which also includes 10bps on account of provision on unhedged forex exposure. Valuation and Recommendation At CMP, stock trades reasonable at 13.5x its FY16E earnings and 2.1x its FY16E ABV (10.8x and 1.7x, respectively, after stripping the value for subsidiaries). We have tweaked the earnings estimates for FY15/16E and expect net income to grow 16.9% CAGR during FY14-16E. We opine that bank would continue its focus on liability franchise (CASA mix) and profitability (RoE is likely to improve to 16% levels during next 2 years with increase in leverage). We believe healthy NIM and moderate rise in opex is likely to provide sufficient cushion to its earnings profile with marginal higher credit costs in FY15. We also believe this is manageable given its healthy coverage ratio (68.4% in Q1FY15), providing sufficient cushion to its future earnings. Sum of Parts Valuation Basis Multiple Year Value / Share Core Banking Business (Standalone) ABV 2.0 FY16 1,501 Overseas Banking Subsidiaries ABV 1.0 FY16 96 Life Insurance Business EV + NBAP 12 FY Non-Life Insurance PAT 10 FY16 48 ICICI Securities PAT 10 FY16 21 ICICI PD Business PAT 10 FY16 21 sasset Management AUM 5% FY16 31 Private Equity AUM 10% FY16 11 Home Finance ABV 2.0 FY16 30 Total Value of subsidiaries % discounted value 320 Total Value 1,821 Source: Kotak Securities - Private Client Research We reiterate BUY on ICICI Bank with a price target of Rs.1821 We opine that management focus on stable growth with improving structural profitability continues which reinforces our existing positive outlook on the stock. We reiterate BUY on the stock with revised TP of Rs.1821 (Rs.1660 earlier) using SOTP method, where the value of its standalone business comes to Rs.1501 (2.0x FY16E ABV) and the value of subsidiaries at Rs.320 (holding company discount: 20% to the fair value of its subsidiaries at Rs.400). Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5

5 Key data (Rs. bn) FY13 FY14 FY15E FY16E Interest income Interest expense Net interest income Growth (%) 29.2% 18.8% 15.1% 17.3% Other income Gross profit Net profit Growth (%) 28.8% 17.8% 15.5% 18.4% Gross NPA (%) Net NPA (%) Net interest margin (%) CAR (%) RoE (%) RoA (%) Dividend per share (Rs.) EPS (Rs) Adjusted BVPS (Rs) P/E (x) P/ABV (x) Source: Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6