ICICI BANK PRICE: RS.277 TARGET PRICE: RS.400 FY17E P/E: 11.2X, P/ABV: 1.7X. Q2FY16 results: Earnings in line; slippages remained elevated

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1 RESULT UPDATE Saday Sinha ICICI BANK PRICE: RS.277 RECOMMENDATION: BUY TARGET PRICE: RS.400 FY17E P/E: 11.2X, P/ABV: 1.7X Q2FY16 results: Earnings in line; slippages remained elevated NII grew 12.8% YoY, largely in line with our expectations on back of 10bps (YoY) improvement in NIM along with healthy loan growth. However, net profit (12.1% YoY) was marginally ahead due to lower than expected provisions (10.9% YoY; down 1.4% QoQ) and marginal decline in tax rate (YoY). Strong retail assets disbursement continued primarily by the strong growth in secured assets along with stable liability franchise. The gross slippages remained high, which could be a near term overhang on the stock performance. Stock trades reasonable valuation (8.1x FY17 earnings and 1.2x FY17 ABV, after stripping the value for subsidiaries). We expect its return ratios to improve in next 2 years (RoE: 16%). Hence, we retain BUY rating on the stock with unchanged TP of Rs.400 using SOTP method, where the value of its standalone business comes to Rs.323 (2.0x FY17E ABV) and the value of subsidiaries at Rs.77 (holding company discount: 20% to the fair value of its subsidiaries at Rs.96). Quarterly Performance (Rs. Mn) Q2FY16 Q2FY15 % Change Int. on advances Int. on investments Int. on RBI/Other balances Other Interest Total Interest earned Interest expenses Net interest income Other income Net Revenue (NII + Other income) Total operating expense Employee cost Other operating expenses Operating profit Provisions Provision for Taxes Deferred tax NM Net profit EPS (Rs.) Core earnings largely in line with our expectations; PAT came marginally ahead due to lower than expected provisions. NII (Rs.52.5 bn) grew 12.8% YoY, largely in line with our expectations on back of 10bps (YoY) improvement in NIM (3.52% in Q2FY16) along with healthy loan growth (13.3% YoY). However, net profit (Rs.30.3 bn; 11.9% YoY) was marginally ahead due to lower than expected provisions (10.9% YoY; down 1.4% QoQ) and marginal decline in tax rate (YoY). Although moderate growth in non-interest income pulled down operating revenue growth (11.7% YoY), containment of operating expenditure (C/I ratio: 37.5%; one of the best amongst private banks) helped in reporting healthy operating profit. 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 12

2 Lower income through exchange rate gains on repatriation of retained earnings from overseas branches (down 45% QoQ; one-off) pulled down the non-interest income (0.6% QoQ) despite strong treasury gains (62% YoY) and healthy traction in fee-based income (5.9% QoQ). Management has indicated that retail segment (predominately retail liability) continued to grow at healthy pace (~15% YoY) while non-retail piece continued to drag YoY (despite QoQ improvement). We believe management's guidance of double digit growth in fee-based income is likely to come from ongoing traction in retail book as well as fees from corporate segment as base effect starts to kick-in. CASA mix witnessed strong traction; we are modeling NIM to come at ~3.4% during FY16/17E Its robust liability franchise has helped over the years in lowering its funding cost. Even though system has been witnessing migration from CASA deposits, its CASA share has remained stable in the range of 43-45% during previous 10 quarters. Average CASA mix has also seen improvement from 39.5% in Q2FY15 to 40.7% in Q2FY16. Strong growth in saving account deposits (14.3% YoY) continued during Q2FY16, while current account floats also witnessed healthy traction (9.7% YoY). As a result, low cost CASA deposits grew 12.9% YoY while total deposits grew 9.2% YoY. We do take cognizance of muted growth in term deposits which has partly aided in the CASA improvement. Trend in Deposit growth Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Deposits (bn) 2, , , , , , , , , , ,846.2 Saving deposits , , , , , ,207.2 Current deposits CASA 1, , , , , , , , , , ,734.9 Term deposits 1, , , , , , , , , , ,111.3 CASA (%) 41.9% 43.2% 43.3% 43.3% 42.9% 43.0% 43.7% 44.0% 45.5% 44.1% 45.1% Strong accretion to low cost deposits has been partly responsible for containing the cost of funds % in Q2FY16 as compared to 6.16% in Q2FY15. Yield on assets has declined 9bps QoQ (8.78% in Q2FY16) largely on decline in yield on advances (down 8bps QoQ; 9.64% in Q2FY16) as bank had cut base rate by 30bps in two tranches (25bps in April; 5bps in June) during previous quarter. Trends in YoA, CoF & NIM (%) Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Yield on Assets 8.86% 8.94% 8.96% 8.90% 8.93% 8.94% 9.08% 8.87% 8.78% Cost of Funds 6.13% 6.21% 6.20% 6.19% 6.16% 6.17% 6.16% 6.03% 5.93% NIM 3.31% 3.32% 3.35% 3.40% 3.42% 3.46% 3.57% 3.54% 3.52% ICICI Bank has further cut the base rate by 35bps in mid September (base rate: 9.35%) whose impact would be visible from Q3FY16. Hence, we are expecting marginal compression in NIM, going forward. We are modeling NIM to come at ~3.4% during FY16/17E based on 1) full impact of recent cuts in base rate, 2) adverse yield mix in relatively faster growing retail book, 3) pricing pressure in corporate segment, 4) limited scope to further improve liability franchise. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 13

3 Retail organic growth continues to be healthy; SME and domestic corporate books saw calibrated growth Strong disbursement in retail segment continued during Q2FY16 primarily by the robust growth in secured assets. ICICI bank reported healthy loan growth (13.3% YoY), largely driven by strong growth in retail book (25.1% YoY), while domestic corporate (7.2% YoY) and SME book (8.2% YoY) continued to witness calibrated growth. Break-up of advances (%) - New Classification Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Retail Business 39.0% 39.6% 39.8% 40.9% 42.5% 42.8% 44.0% Domestic Corporate (includes builder finance) 30.1% 30.4% 30.0% 29.0% 28.8% 28.7% 28.4% SME 4.4% 4.4% 4.5% 4.4% 4.4% 4.3% 4.3% Overseas Branches 26.5% 25.6% 25.7% 25.7% 24.3% 24.2% 23.3% Trends in loan book (New Classification) (Rs. Bn) Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 YOY (%) QoQ (%) Advances 3, , , , , , , % 2.5% Retail Business 1, , , , , , , % 5.4% Domestic Corporate 1, , , , , , , % 1.4% SME % 2.5% Overseas Branches % -1.3% Strong growth in retail book has been contributed by housing (25.3% YoY; 5.8% QoQ), auto 22.9% YoY) and PL (55.5% YoY) segments. However, management has adopted the calibrated approach for the CV business which grew 5.6% (YoY) after witnessing run-down on its bought-out portfolio for past several quarters. PL segment continued to grow faster and this has led to increase in its share in retail portfolio from 3.7% in Q2FY15 to 4.6% in Q2FY16. Trend in retail loan book Rs. Bn Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 YOY (%) QoQ (%) Retail loans % 5.4% Vehicle Loans % 5.4% Auto % 4.5% CV % 7.1% Housing % 5.8% Business Banking % 9.3% PL % 10.2% Credit Cards % 9.8% Others % 0.5% 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 while retail piece would continue to grow at healthy pace. Fresh slippage remained high; however, management has reiterated its guidance of lower impairments during FY16. The gross slippage during Q2FY16 remained high at 2.3% (annualized), which could be a near term overhang on the stock performance. Loan worth Rs.22.4 bn slipped into NPA (including Rs.9.3 bn slippage from restructured book) while Rs.1.0 bn worth of loans were restructured during Q2FY16 implying fresh impairment at Rs.23.4 bn, about 17.4% of impairments seen during FY15 (~44% during H1FY16). Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 14

4 Trends in NPAs (Rs. Bn) Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Gross NPAs Gross NPAs (%) 2.76% 2.68% 2.66% 2.56% 2.69% 2.74% 3.00% 3.29% 3.26% 3.36% Net NPAs Net NPAs (%) 0.69% 0.73% 0.81% 0.82% 0.87% 0.96% 1.12% 1.40% 1.40% 1.47% Cumulative Provisions Outstanding Std assets provisions PCR (%) 75.4% 73.1% 70.0% 68.6% 68.4% 65.9% 63.5% 58.6% 58.2% 57.4% However, up-gradation/cash recovery was marginally higher (Q2FY16) at ~32% of gross slippage as against the run-rate of ~23% seen during FY15. In percentage terms, GNPA/NNPA saw marginal deterioration to 3.36% (3.26% in Q1FY16) and 1.47% (1.40% in Q1FY16), respectively, while in absolute terms they grew 4.8%/6.7% respectively. Management had guided during Q1FY16 earnings call that incremental stress buildup was being front-loaded during Q1FY16 and overall stress formation during FY16 would be lower than that of FY15. They have reiterated their guidance during current quarter and stress formation during H1FY16 is ~44% of loan impairment seen during FY15. They have also indicated that credit cost during FY16 is likely to be in the range of 90-95bps. ICICI bank has reported higher slippage from restructured book and its outstanding restructured portfolio (Rs bn; 2.9% of advances) is lower than the industry average. Movement of NPA (Rs Bn) Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Opening balance Slippage Upgrade + Recovery W/O & sale Closing balance The share of retail portfolio in GNPA has fallen from 39% in Q4FY14 to ~22% in Q2FY16, on back of fresh delinquencies coming primarily from SMEs and mid corporate. However, bank has been making lower provisions on incremental stress in the retail segment during last few quarters translating into faster slide in the provision coverage ratio of retail segment. Trends in NPLs Rs. Bn Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Retail - GNPA Corporate - GNPA PCR - Retail (%) 85.7% 84.5% 82.3% 80.2% 77.7% 75.2% 73.3% 70.8% 67.5% 66.8% PCR - Corporate (%) 63.5% 62.4% 61.1% 61.4% 63.6% 61.7% 60.0% 55.0% 55.2% 54.7% Retail - NNPA Corporate - NNPA Retail share in GNPA (%) 53.8% 48.7% 42.5% 39.0% 34.4% 30.7% 26.4% 22.2% 23.8% 22.1% Corporate share in GNPA (%) 46.2% 51.3% 57.5% 61.0% 65.6% 69.3% 73.6% 77.8% 76.2% 77.9% Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 15

5 Provisions rose 10.9% YoY to Rs.9.4 bn with credit cost coming at 97bps in Q2FY16, marginally higher than the management's guidance of 90-95bps (FY16). However, we opine that healthy NIM and opex containment are likely to provide sufficient cushion to its future earnings profile with marginal higher credit costs during FY16. Valuation and Recommendation At CMP, stock trades at reasonable valuation of 11.2x its FY17E earnings and 1.7x its FY17E ABV (8.1x and 1.2x, respectively, after stripping the value for subsidiaries). We have tweaked the earnings estimates for FY16/17E and expect net income to grow 13.3% CAGR during FY15-17E. We are of the view that bank would continue its focus on liability franchise and profitability (RoE is likely to improve to 16%+ levels during next 2 years with increase in leverage). Sum-of-the-parts Valuation (SOTP) (Based on FY17) Basis Multiple Value / Share Core Banking Business (Standalone) ABV Overseas Banking Subsidiaries ABV Life Insurance Business EV + NBAP Non-Life Insurance PAT ICICI Securities PAT 10 5 ICICI PD Business PAT 10 6 Asset Management AUM 4% 6 Private Equity AUM 10% 3 Home Finance ABV Total Value of subsidiaries 96 20% discounted value 77 Total Value 400 Source: Kotak Securities - Private Client Research We recommend BUY on ICICI Bank with a price target of Rs.400 We retain BUY rating on the stock with unchanged TP of Rs.400 using SOTP method, where the value of its standalone business comes to Rs.323 (2.0x FY17E ABV) and the value of subsidiaries at Rs.77 (holding company discount: 20% to the fair value of its subsidiaries at Rs.96). Key data (Rs. bn) FY14 FY15 FY16E FY17E Interest income Interest expense Net interest income Growth (%) 18.8% 15.6% 13.0% 14.4% Other income Gross profit Net profit Growth (%) 17.8% 13.9% 10.4% 16.3% Gross NPA (%) Net NPA (%) NIM (%) CAR (%) RoE (%) RoA (%) Dividend per share (Rs.) EPS (Rs) Adjusted BVPS (Rs) P/E (x) P/ABV (x) Source: Kotak Securities - Private Client Research, Company Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 16