Banking Powerhouse INITIATING COVERAGE

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1 Banking Powerhouse INITIATING COVERAGE Industry Mr N.S. Kannan Executive Director & CFO ICICI BANK (O) Stock metrics Bloomberg code Reuters code BSE Group ICICIBCIN ICBK.BO BSE Code NSE Symbol A ICICIBANK Face Value Rs 10 Market Data Market Cap (Rs cr) WeekHigh/Low / Sensex Nifty 5136 Average volume % 3% 6% Bank Shareholding Pattern : Current Price Target Price Rs. 918 Rs Potential Upside 18% ICICI BANK On the growth trajectory: ICICI Bank, India s largest private sector bank is well geared and capitalized to enter the next phase of growth. With continued focus on bank's articulated 4c (CASA growth, capital conservation, improving cost of funds and controlling costs) strategy, the bank is set to return to growth path expecting about 14% credit growth in FY11; however this in line with the industry growth rate would be lower by around 5-7%. The bank expects retail book to grow by 15 to 20% and the balance sheet to grow by around 20%. Capital Adequacy Ratio: ICICI Bank s capital adequacy is one of the best in the sectors and at March 31, 2010 as per RBI s revised guidelines was reported 19.4% and Tier-1 capital adequacy was 14.0%, well above the stipulated norm of 9.0% and 6.0% respectively. Asset Quality Worst is over: On Bank s asset quality side, the worst seems to be over. Incremental Non Performing Loans addition has slowed down in recent months and overall asset quality trends are performing well. Net non-performing assets reflected a sharp decline to Rs. 3,901 crore at March 31, 2010 from Rs. 4,619 crore at March 31, 2009 and net NPA ratio decreased by 32 basis points to1.87%. Valuation: Due to the diversified business portfolio of ICICI Bank, we have valued its stock on SOTP basis. The stock is trading at a PE of 24.65x and 20.6x and 15.4x FY11 and FY12 estimated earnings. While on P/Adj BV basis it is trading at 1.8 and 1.7 FY11 and FY12 respectively. We initiate coverage on ICICI Bank with a BUY recommendation and SOTP target price of Rs with upside potential of 18%. Foreign Non Promoter Corp. Hold. Research Analyst Institutions Public & Others 66% Anshuman Jain anshuman.jain@inventuregrowth.com Extn: 579 Denil Savla denil.savla@inventuregrowth.com Extn: 581 Key Financials FY09 FY10 FY11E FY12E NII PAT EPS P/E (x) P/BV ROE ROA Source: IGSL Research Date: 11 th May,

2 Company background ICICI Bank Limited, incorporated in Vadodara in the year 1994 is India s largest private sector bank under the house of ICICI. It is the second-largest bank in India with a market share of approximately 10% and has leading market share in most retail loan segments. The bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI is India s largest private sector bank and ranks among the top 100 financial institutions of the world in terms of market Capitalization.. ICICI Bank with total assets of Rs. 3,634 billion as of March 31, 2010 breaks into the top 100 financial institutions in the world, in terms of market capitalization. It is a multi-specialist financial service provider with leadership position across the range of financial services in India. The Bank has a network of 2000 branches which is the largest among the private sector banks and about 4,883 ATMs in India along with presence in 18 countries globally. ICICI is running its business with six principal groups, such as Retail Banking, Wholesale Banking, International Banking, Rural, Micro Banking and Agriculture-Business, Government Banking and Corporate Centre. ICICI has a diversified portfolio of businesses and offers a wide spectrum of financial services through specialized subsidiaries.. The Bank offers a wide spectrum of domestic and international banking services to facilitate trade, investment banking Insurance, Venture Capital, asset management, cross border business & treasury and foreign exchange services besides providing a full range of deposit and ancillary services for both individuals and corporate through various delivery Channels and specialized subsidiaries. Through its subsidiaries, ICICI is a leading player in insurance and asset management sector. The banks strategic focus has changed from balance sheet growth and market share to improving profitability and return ratios. 2

3 Overall asset quality trends are behaving well.. Net non-performing assets have shown a sharp decline with banks selective approach on unsecured lending. Higher Proportion of CASA will continue to positively impact cost of funds. Investment rationale Good Asset Quality: We believe that the incremental addition to NPLs has slowed down in recent months mainly due to the bank s selective approach on unsecured lending. Overall asset quality trends are behaving well as the bank has shifted its focus on secured lending such as housing loans, car loans and commercial loans. Bank s unsecured loan book has dropped to less than 5% from 17% at one point of time. Net non-performing assets decreased to Rs. 3,901 crore at March 31, 2010 from Rs. 4,619 crore at March 31, The Bank s net non-performing asset ratio decreased by 32 basis points to 1.87% at March 31, 2010 from 2.19% as compared to previous quarter and 9 bps as compared to the previous year. The Bank s provisioning coverage ratio computed in accordance with RBI guidelines at end March, was reported at 59.5% compared to 51.2% in the previous quarter and is expected to be around 72% in FY12E. Managements 4C Strategy to drive growth: Management has been constantly working on 4C (CASA, cost, credit and capital) strategy and has proved to be successful in meeting its goal. The bank significantly strengthened its deposits franchise last year. As a result bank s CASA deposit base has gone up by Rs crore during the fiscal year and the CASA ratio has jumped to 41.7% at end March 2010 from 28.7% at end March Also the bank expects to maintain the CASA ratio at around 40% levels in FY11. The bank has set up around 1000 branches in last couple of years and has continued focus on increasing its branch network as it is a huge source of low cost deposits. On other hand, decline in NPA s would result in credit cost normalization. Furthermore, as pressure on asset quality will reduce, the bank will start refocusing on balance sheet growth. The management expects to grow the balance sheet by 20% this fiscal. Business strategies: ICICI being the largest private sector bank in India has a significant scale. In the competitive environment of the banking business, the bank has introduced an all new way of banking that is Television banking. This service enables the consumers to get information on loans, accounts, deposits to additional services like financial counseling, interactive features like calculators for loans and premiums. This all new innovative strategy has certainly revolutionized banking by bringing it right into the living rooms. To efficiently distribute its products and services, the bank has 3

4 Source: Company 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Branches network FY05 FY06 FY07 FY08 FY09 FY10 Year CAR(%) Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY Strong Subsidiary performance to add value PAT FY2009 FY2010 ICICI Securities Ltd ICICI Securities PD ICICI Venture ICICI Pru AMC Source: Company developed multiple access channels comprising of branches, ATMs, call centers and Internet banking. The Bank has introduced the concept of mobile ATMs in the remote/rural areas. It has also extended its mobile banking services to all cellular service providers across India and NRI customers in USA, UK, Middle-East and Singapore. Focus on Branch Expansion: ICICI Bank continues to invest in expansion of its branch network to enhance its deposit franchise and create an integrated distribution network for both asset and liability products. The Bank has a network of 2000 branches and about 4,883 ATMs in India and has a geographical presence in 18 countries. The bank has already added 306 new branches in FY10 to its network and is in the process of implementing the branch licenses received from Reserve Bank of India, thereby expanding the domestic branch network. Thus by expanding its branch network the bank would be able to increase its CASA deposits which are a huge source of low cost deposits and will further reduce the cost of funds. Adequately capitalized to drive growth: The Bank s capital adequacy ratio as per Reserve Bank of India s revised guidelines on Basel II norms stood at 19.4% at March 31, 2010, well above RBI s requirement of total capital adequacy of 9.0%. The bank reported Tier-1 capital adequacy ratio of 14.0%, way over the benchmark rate of 6.0%. This is among the best in the industry. As loan growth is likely to remain around 14% and earnings momentum to be strong, we expect the bank to maintain superior tier-i ratio of around 12% by FY12. However having excess capital will further depress the return ratio, which at FY10 remained at 7.7% and is expected to remain in single digits for FY11. Subsidiaries strong performance: ICICI Bank is a financial conglomerate with interest varying from Prudential Life Insurance to General Insurance and from Venture Capital to Security broking. Furthermore, it gains interest from Investment Banking, Mutual fund (AMC) and International banking. The Bank has about 18 subsidiaries across the globe, and they together accounted for approximately 25% of the bank s consolidated assets in FY10. Most of the bank s subsidiaries have shown a rise in profit. ICICI Prudential Life Insurance Company which broke even this fiscal has reported a net profit of Rs 258 crore for the first time in its 10- year history. ICICI Lombard General Insurance posted a sharp rise in its net profit to Rs 144 crore from Rs. 24 crore. 4

5 ICICI Asset Management Company s profit after tax increased to Rs. 128 crore from Rs. 70 lakhs while ICICI Securities net profit rose to Rs. 123 crore from Rs. 4 crore. ICICI Venture posted a fall in net profit to Rs 50 crore from Rs 140 crore last year ICICI bank reported flat NIMs QoQ and lagged its industry peers. 3.00% 2.00% 1.00% F1Q08 F2Q08 F3Q08 Net Interest Margin F4Q08 Source: IGSL Research F1Q09 F2Q09 Bank has significantly cut down its operating expenses in past quarters.. F3Q09 F4Q09 F1Q10 F2Q10 F3Q10 F4Q10 CASA to drive NIMs: ICICI Bank has already made tremendous progress towards increasing CASA and stabilizing asset quality. CASA is huge source of low cost deposits and helps in reducing the cost of funds and thus improves the net interest margin. The bank's CASA ratio was reported at 41.7% at end March 2010 as compared to 28.7% at end March ICICI Bank continues to invest in expansion of its branch network to grow its CASA base and to create an integrated distribution network for both asset and liability products. However it is expected that margins might fall in 1QFY11 due to the impact of CRR hike, and shifting of savings deposits calculation to average daily basis impacting the margin by around 15bps in the first quarter. Cost containment approach: One of the most significant achievements of the bank over the last couple of years has been a tight control on operating expenses. The bank has significantly cut down the operating expenses. The reduction in operating costs, especially employee expenses, is a key flexibility demonstrated by ICICI Bank. Bank s strategy on cost rationalization focused on outsourced manpower, retail collection expenses and the excess physical infrastructure has helped curtailing expenses. Most of the loan products are promoted by the bank staff and the use of DMA has been reduced to bare minimum. Refocusing on customer relationship: The management is constantly focusing on improving its image across all customers by building personal relations with its customers. The bank has exited its strategy of encouraging customers to use ATMs and internet banking and is rather increasing its branch banking focus, as the latter helps in building relationship between the customer and the bank. 5

6 Fee income continued to reflect a strong growth and is likely to improve with a pick up in credit growth. With a capital adequacy of 19.4% we expect that ICICI Bank is well placed to leverage when the credit demand revives. Fee income expected to rise from this point, grew by 13% y-o-y in 4QFY10 According to the central bank's provisional data, Bank credit in India grew an annual 17.05% in early April, in tune with a rise in business and consumer confidence, from a low 9.7 % in October as compared with 16.7% at end-march. Fee income is aided by the pick-up in loan disbursement activity. Also loan demand is expected to pick up further in the first half of FY11 as industries will need more funds to expand operations in an economy forecast to grow more than 8 % this fiscal year. Thus credit growth will boost credit-related fee income, while core fee income and fees from third-party distribution are also set to rise. Thus reflecting that trend of declining fee income appears to have bottom lined as it grew by 13% y-o-y. Furthermore, ICICI's treasury reported a gain of 196 Crs in 4QFY10 resulting in a 13% increase in non-interest income, essentially from equities, government securities, and reduction in mark-to market on credit derivative portfolio. Ahead of Expectations The PAT for Q4FY10 has come at Rs. 1,005 Crs and was reported at Rs for the full year. Due to the cost containment approach of the bank, Operating Profit grew by 23% on y-o-y basis, though there was a marginal rise in its NIMs. In FY10 deposits declined, mainly due to retirement of high-cost deposits amounting to Rs 30,000 crore, however the bank expects to grow its retail deposit base by around 20% this fiscal. While on the loans front, the bank has resumed double-digit growth trajectory, logging 12 % y-o-y growth in the reporting quarter. We expect the advances to grow by 14% this fiscal, where demand for credit would be mainly driven by home loans, car loans, commercial vehicle loans, project finance and trade finance. In addition the management expects to grow the balance sheet by around 20%. On the other hand, NPA slippages have moderated while Net interest margin continued to expand. The bank seems to be adequately capitalized with a very high capital adequacy of 19.4% and is expected to grow as the credit demand revives. 6

7 ICICI Bank has shrinked its unsecured loan book from 17% from one point of time to 5% now... CRR hike and change in interest rate calculation on savings account will affect the margins by around 15bps. ICICI has reduced the use of Direct Marketing Agents to bare minimum.. The bank has been selective in its approach towards unsecured lending in past couple of years.. Investment Concerns: Risk to margins: Weak credit demand for the past couple of years has affected ICICI s retail loan book. The bank has consciously withdrawn from some retail segments and has made a selective approach on unsecured lending. Bank s unsecured loan book has dropped to less than 5% from 17% at one point of time. ICICI is experiencing increasing competition in its targeted segment of home and car loan markets. Thus weak credit demand coupled with bank s selective approach has resulted in intense competition. Most of the PSU banks are offering competitive and attractive rates in the mortgage and auto loan categories, thereby forcing private banks to offer lower rates impacting their margins. Also due to the impact of CRR hike, and change in savings deposits calculation to average daily basis is further expected to affect the margins by around 15bps in the first quarter this fiscal. Changing retail focus: The bank has exited from its earlier strategy of discouraging branch banking and is aggressively focusing on reconnecting with its existing customers and tapping its customer base for cross-selling products. This is in contrast to its earlier strategy of aggressively acquiring new customers across all products segments through the use of direct marketing agents. The bank has severely cut down its DMA expenses and has reduced its use to minimum possible. However this strategy of bank may require some time and might affect the bank s market share. Selective Approach: During the past few years the bank has adopted a selective approach towards unsecured lending. The management has indicated that they would be very selective on unsecured loans and credit cards, and will only be grating loans to existing long standing relationship customers. This approach of the bank towards secured lending to grow its retail base is positive from credit quality perspective, but negative from asset yield and NIM perspective. Employee expenses might peak up: For the first time since the global financial crisis, the bank has handed out bonuses and double digit salary hikes which resulted in a 36% q-o-q rise in employee expenses. We believe that costs would peak up over the next couple of years on the back of robust credit growth and increasing wage levels. Also with the loan book expansion and opening up of new braches, the expenses are expected to rise from the current levels 7

8 . RBI s stipulated 70% provisioning requirement: ICICI Bank s current coverage is approximately 60%, which is lower than the 70% reserve requirement prescribed by the RBI. Banking Overview: Banking sector is likely to see credit growth of % in the current fiscal.. The Indian banking industry s strength comes from its huge deposit base, which is consistently growing. RBI s has taken proactive measures to steadily improve banks balance sheet strength, and a demand in the economy for physical asset creation. The growth of banking in the coming years is likely to be more qualitative than quantitative. The banking sector is likely to see credit growth of % in the current fiscal, driven by demand from infrastructure and retail and working capital financing. Banks are expected to achieve a compounded growth rate of 25 % in deposits. India's average GDP growth is likely to be 8.5 % over the next three years. However, high inflation could hinder India's midterm economic growth. We expect strong core operating performance by the Banking sector driven by robust loan growth, rising NIMs, strong rise in core fee income growth. Though interest rates are set to rise, lag in deposit re-pricing, rising credit-to-deposit ratio and higher yield on investments will likely boost margins. The gross non-performing assets for the banking system are likely to be 3.5 % for the 2011 fiscal. Sectors such as real estate, textiles and export-oriented small and medium enterprises are likely to contribute to the NPAs. NIMs will rise; coupled with acceleration in loan growth. Thus after a period of consolidation, it is expected that the Indian economy is well placed to grow rapidly again. With ample liquidity in the banking system, it is expected that the interest rate would remain benign. In our view, these factors are favorable for a higher credit demand in the economy. 8

9 Summary and Conclusions: The banking sector is likely to see credit growth of % in the current fiscal; though we estimate that ICICI Bank with its continued focus on articulated 4c strategy is set to return to growth path expecting about 14% credit growth in FY11. However this in line with the industry growth rate would be lower by around 5-7% due to bank s flat overseas loan book expectation which adds to about 25% of loan book. Also with sustained investments in expansion of branch network will further enhance CASA ratio, which is expected to remain around 40-42% in FY11. In addition, the bank expects to grow its balance sheet by 20%. Furthermore, retail deposits will help in improving the net interest margins in coming fiscals. Thus it is expected that bank will continue to outperform with improved interest income, non interest income, and controlled cost coupled with relatively lower NPA provisioning. On risk front, unexpected deterioration in asset quality position and economic downturn could be key downside triggers going forward. 9

10 VALUATION We have valued the stock on SOTP basis due to the diversified financial business. We expect ICICI Bank to post EPS of Rs45 in FY11 and Rs60 in FY12. BV would be Rs494 in FY11 and Rs539 in FY12. We expect ICICI Bank to report RoE of around 12% by FY12E, with Capital adequacy of ~17%. We expect that ICICI Bank will maintain Provision coverage ratio of around 72% in FY12E and thus meet RBI s stipulated norm of 70%. ABV (adjusted for investment in subsidiaries) will be Rs. 390 in FY12E. Adjusted subsidiary value for FY12E- will be Rs299 per share after 10% holding company discount, the stock trades at 2x FY12E ABV. Thus we initiate coverage on ICICI Bank with a BUY recommendation and our FY12E based SOTP price target is Rs1078 with upside potential of around 18%. SOTP Valuation Basis of Valuation Value ICICI's Stake Value to ICICI Value Per Share (Rs) Joint Ventures ICICI Prudential Life Insurance 17x FY12E NBAP Earnings % ICICI Lombard General Insurance 16x FY12E Earnings % ICICI Prudential AMC 4% of FY12E AUM % Value per share from JV's Value per share from 10% discount Domestic Subsidiaries ICICI Securities Ltd 16x FY12E Earnings % ICICI Securities PD Ltd 16x FY12E Earnings % ICICI Venture 10% of FY12E FUM % ICICI Home Finance 2x of FY12E BV % Overseas Banking subsidiaries ICICI Bank UK 1x Amt invested % ICICI Bank Canada 1x Amt invested % Value per share from subsidiaries Value per share from discount 124 ICICI Bank (Core Banking- India) 2x FY12E ABV Value per Share

11 Sensex v/s ICICI Bank Ltd ICICI Bank has outperformed the Sensex in last one year and is expected to do so. Source: Capital line, IGSL Research EARNINGS PER SHARE ICICI has a rising trend of earnings per share on y-o-y basis, which depicts a healthy future growth FY08 FY09 FY10 FY11E FY12E RETURN ON ASSETS 1.60% 1.46% Return on Assets to expand as the 4C s strategy bears results % 1.20% 1.00% 1.04% 1.00% 1.13% 1.24% 0.80% 0.60% 0.40% 0.20% 0.00% FY08 FY09 FY10 FY11E FY12E 11

12 RETURN ON EQUITY 14.00% 12.00% 11.75% 11.54% Return on Equity to cross the double digit mark by FY % 8.00% 6.00% 7.83% 7.97% 9.31% 4.00% 2.00% 0.00% FY08 FY09 FY10 FY11E FY12E Retail Loan book break-up in FY3Q10 ICICI has most of the retail lending towards home loans and further expects to grow its business by growing home and car loans.. Home Loans Automobile Loans Other secured Personal Loans Credit cards ICICI s retail lending is on a decline and the bank focuses on growing its Corporate and SME Loans.. 12

13 CASA Ratio (%) Banks actual CASA deposit base has gone up by Rs crore during the year and the CASA Ratio was reported 41.7% at FY QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 Profit and Loss Statement Rs. Crs Particulars (Year end March) FY08 FY09 FY10 FY11E FY12E Interest Earned Interest expended Net interest income Other Income Net total income Payments to/provisions for Employees DMA Expenses Other Expenses Total Operating Expenses Operating Profit before prov. & Cont Total Provisions Profir before Tax Provisions for Tax Net Profit Source: IGSL Research 13

14 Balance Sheet Data Rs. Crs Particulars Year end - March FY08 FY09 FY10 FY11E FY12E Equity Capital Preference Share capital Reserves and surplus Shareholders Equity (Net-worth) Deposits Borrowings Other Liabilities and Provisions Total Capital and Liabilities Balances with RBI and banks Investments Advances Fixed and other assets Total Assets Source: IGSL Research 14

15 Financial Valuation and Ratios: Operating Ratios FY08 FY09 FY10 FY11E FY12E Cost to Income Ratio (%) Net Interest Margins (%) PE(x) P/BV EPS BVPS Profitability ratios (%) FY08 FY09 FY10 FY11E FY12E ROE ROA Other income/net income Asset Liability Profile (%) FY08 FY09 FY10 FY11E FY12E Advances/Deposit ratio Investment/Deposit ratio Gross NPL Ratio Net NPL Ratio Net NPA as % of advances Provision Coverage Ratio Capital Adequacy Ratios (%) FY08 FY09 FY10 FY11E FY12E Tier I Tier II CAR (%) Growth ratios (%) FY08 FY09 FY10 FY11E FY12E Net interest income Non interest income Assets Growth Advances Growth Operating Expenses Operating Profits Net Profit Source: IGSL Research 15

16 Peer Comparison Rs. Crs Balance Sheet ICICI HDFC Axis Bank PNB SBI BOB Capital Reserves Total Deposits Investments Advances Total Assets Profit and Loss ICICI HDFC Axis Bank PNB SBI BOB NII PAT Net NPA % CAR(%) Financial Ratios ICICI HDFC Axis Bank PNB SBI BOB EPS P/E(x) Book Value ROA (%) P/BV Credit - Deposit (%) Return on Equity Source: IGSL Research 16

17 For any queries please feel free to contact our Institutional Research Team Names Designation Id. Contact Number Nagji Rita CMD - - SALES Ravinder Kasliwal Head Institutional Sales ravinder.kasliwal@inveturegrowth.com /66 Dealing Vinit Rita Institutional Dealer vinit.rita@inventuregrowth.com /66 Rashda Ainapore Institutional Dealer rashda.ainapore@inventuregrowth.com /66 Puja Shah Institutional Dealer puja.shah@inventuregrowth.com /66 Research Denil Savla Research Analyst denil.savla@inventuregrowth.com * 581 Sheetal Nirmal Research Analyst sheetal.nirmal@inventuregorwth.com * 628 Pankti Shah Research Analyst pankti.shah@inventuregrowth.com * 583 Divya Kant Research Analyst divya.kant@inventuregrowth.com * 582 Anshuman Jain Research Analyst anshuman.jain@inventuregrowth.com * 579 Sanjeev Haria Research Analyst sanjeev.haria@inventuregrowth.com Sibayan Banerjee Technical Analyst sibayan.banerjee@inventuregrowth.com Ashok Patel Technical Analyst ashok.patel@inventuregrowth.com Madhu Patel Technical Analyst madhu.patel@inventuregrowth.com Disclaimer This Document has been prepared by Inventure Growth & Securities Ltd. The information, analysis and estimates contained herein are based on Inventure s assessment and have been obtained from sources believed to be reliable. Neither Inventure Growth & Securities Ltd nor any of its employees or associates accepts any liability whatsoever direct or indirect that may arise from the use of information herein and shall not be responsible for its completeness and accuracy. It is not an offer to sell or a solicitation to buy securities. This document is for circulation only Visit us at Please send your Feed Back to igslresearch@inventuregrowth.com Inventure Growth & Securities Ltd Corporate Office: - Viraj Tower, 2 nd Floor, Near Landmark, Western Express Highway, Andheri East, Mumbai Tel.: , Fax: