ICICI BANK Ltd. BUY CMP (Rs.) 334 Target (Rs.) 382 Potential Upside 15% Tide set to turn favourably... For private circulation only

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1 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Volume No.. III Issue No ICICI BANK Ltd. Feb. 08, 2018 BSE Code: NSE Code: ICICIBANK Reuters Code: ICBK.NS Bloomberg Code: ICICIBC:IN Tide set to turn favourably... ICICI Bank is India's largest private sector bank with a network of 4,860Branches and 14,262 ATM's across India. The bank has achieved consistent growth over the last 5 years with a CAGR (FY12-17) of 1 in Total Assets, 14% in Total Deposits, 13% in Total Advances and 9% in Net Profit. Investment Rationale Retail segment to drive credit growth: ICICI Bank s advances grew at a healthy pace of 13% CAGR over FY12-17 to Rs464,232cr, primarily driven by growth in retail business. Within retail, personal loans & credit cards (unsecured) and home loans (secured) portfolios grew at a CAGR of 43% (albeit on a low base) and 21%, respectively. Going forward, we believe that retail credit growth momentum to drive the bank s loan book and expect advances to grow at 14% CAGR over FY17-20E mainly led by 19% growth in retail loans. Robust retail liability franchise: Bank continues to show thrust for low cost deposits due to its strong presence in current accounts savings account (CASA) rich regions. CASA (current accounts savings accounts) deposits of the bank stood at healthy 5 as of FY17 (growth of 17% CAGR over FY12-17). CASA deposits mobilization outpaced the term deposits ramp up with CA and SA grew at a CAGR of 17% and 18%, respectively over FY12-17 vis-à-vis 11% CAGR in the term deposits. Going forward, we expect deposits will continue to grow at a healthy CAGR of 13% over FY17-20E mainly led by 14% CAGR growth in savings deposit. Improvement in return ratios are on track: ROE and ROA have remained subdued at 11.4% and 1.4% in FY16 and 10.3% and 1.3% in FY17, respectively due to asset quality hiccups. Although asset quality stress will impact nearterm outlook, we expect the bank s core performance to improve over FY18E- 20E and deliver RoE and RoA of 12% and 1.4%, respectively in FY20E. Improving trend of underlying asset quality: ICICI Bank s asset quality remained under pressure over last two years on the back of higher slippages from the bank s exposure to some of the stressed corporates. However, the bank reoriented its balance sheet mix towards less risky retail segment post FY12. As a result, we expect slippages to remain less volatile and to decline gradually which will help in improvement of Gross/Net NPA ratios to 6.3%/3.2% by FY20E. Valuation: We like ICICI bank given its improving B/S mix with higher contribution from granular business (Retail) coupled with strong capitalization. Further, the bank s low divergence is a strong positive as it reflects that corporate healing is underway. The bank has also managed the volatility in stressed loans much better than any other private corporate bank. Hence, we maintain BUY rating on the stock with a target price (TP) of Rs382 using sum of the part (SOTP) methodology, where we value its standalone business at Rs280 (P/ABV of 1.8x for FY20E) and subsidiaries at Rs102. Market Data Rating BUY CMP (Rs.) 334 Target (Rs.) 382 Potential Upside 15% Duration Long Term Face Value (Rs.) 2 52 week H/L (Rs.) 366/241 Adj. all time High (Rs.) 366 Decline from 52WH (%) 8.7 Rise from 52WL (%) 38.6 Beta 1.6 Mkt. Cap (Rs.Cr) 214,909 Fiscal Year Ended Y/E FY17 FY18E FY19E FY20E Interest Income (Rs.Cr) 54,156 55,412 62,273 70,820 Interest Expense (Rs.Cr) 32,419 32,349 35,927 40,854 Net Interest Income (Rs. Cr) 21,737 23,063 26,346 29,966 Pre Pro Profit (Rs. Cr) 26,487 22,738 25,451 29,209 EPS P/E (x) P/BV (x) P/ABV (x) ROE (%) ROA (%) One year Price Chart ICICI Bank Sensex (rebased) Shareholding Pattern Dec-17 Sep-17 Chg. Promoters (%) Public (%)

2 ICICI Bank - Company Overview ICICI Bank is India's largest private sector bank with total assets of Rs771,791cr as of FY17 and profit after tax of Rs9,801cr in FY17. ICICI Bank is India's largest private sector bank with total assets of Rs771,791cr as of FY17 and profit after tax of Rs9,801cr in FY17. It currently has a network of 4,860 Branches and 14,262 ATM's across India. The bank has achieved consistent growth over the last 5 years with a CAGR (FY12-17) of 1 in Total Assets, 14% in Total Deposits, 13% in Total Advances and 9% in Net Profit. Retail segment to drive credit growth ICICI Bank s advances grew at a healthy pace of 13% CAGR over FY12-17 to Rs464,232cr, primarily driven by growth in retail business. Within retail, personal loans & credit cards (unsecured) and home loans (secured) portfolios grew at a CAGR of 43% (albeit on a low base) and 21%, respectively. ICICI Bank s loan portfolio has become more broad-based over the last five years and the share of retail loans has improved steadily to 62% of overall domestic loans as of FY17 from 52% as of FY12. This would help ICICI Bank contain slippages and credit cost in the future. Advances to grow at a CAGR of 14% over FY17-20E 8,00,000 6,00, % 14.4% 16.7% 14.4% 12.3% % 14.8% 15% 4,00,000 2,00, % 6,86,312 5,97,791 2,53,728 2,90,249 3,38,703 3,87,522 4,35,264 5,24,698 4,64,232 Advances (Rs cr) Advances Growth (%) 1 5% Share of domestic retail advances increased to 62% of total domestic advances % % 5.5% 5.7% 39.4% 43.5% 40.9% % 32.6% 52.3% 49.5% % 59.4% 61.8% FY12 FY13 FY14 FY15 FY16 FY17 Retail Domestic Corporate SME Even in Q3FY18, retail loan book continued to show strong growth traction with 22% YoY growth. As a result, share of retail loans in overall loans increased to 54% as compared to 49% in Q3FY17. Meanwhile, corporate advances grew at a modest pace of 5% YoY as the bank continues to focus on lending to better rated corporates. Going forward, we expect advances to grow at 14% CAGR over FY17-20E mainly led by 19% growth in retail loan book.

3 Robust retail liability franchise ICICI Bank continues to show thrust for low cost deposits due to its strong presence in current accounts savings account (CASA) rich regions. CASA (current accounts savings accounts) deposits of the bank stood at healthy 5 as of FY17 (growth of 17% CAGR over FY12-17). CASA deposits mobilization outpaced the term deposits ramp up with CA and SA grew at a CAGR of 17% and 18%, respectively over FY12-17 vis-à-vis 11% CAGR in the term deposits. Notably, despite high base of Q3FY17 on the back of demonetization, deposits grew at a decent pace of 11% YoY in Q3FY18 led by higher traction in CASA deposits ( 12% YoY). Thus, CASA ratio improved by 52 bps YoY to 50.4%. Going forward, we expect deposits will continue to grow at a healthy CAGR of 13% over FY17-20E mainly led by 14% CAGR growth in savings deposit. Deposits to grow at a CAGR of 13% over FY17-20E 8,00,000 6,00,000 4,00,000 2,00, % 16.3% 13.3% 14.5% 14.3% 13.4% % 8.9% 7,07,193 6,18,806 4,90,039 5,47,545 2,55,500 2,92,614 3,31,914 4,21,426 3,61,563 Deposits (Rs cr) Deposits Growth (%) 15% 1 5% Consistent increase in share of low cost (CASA) deposits in total deposits % 58.1% 57.1% 54.5% 54.2% 49.6% 43.5% 50.4% 41.9% 42.9% 45.5% 45.8% 29.8% 29.3% 29.9% 31.8% 31.9% 35.1% 13.7% 12.6% % % FY12 FY13 FY14 FY15 FY16 FY Current Accounts Savings Accounts Term Deposits CASA Net Interest Margin (NIM) to remain stable The bank has shown remarkable improvement in NIM (calc) which has expanded from 2.8% in FY12 to 3.6% in FY17 backed by Net Interest Income (NII) growth of 15% CAGR over FY Despite asset quality headwinds on the bank, we expect ICICI Bank to maintain its margin broadly in the narrow range of % over FY17-20E supported by (1) higher share of low cost deposits (CASA ratio to remain around 5) and (2) strong growth in high yielding unsecured retail advances.

4 NIM to remain broadly steady in the range of % over FY17-20E Yield on Funds (%) NIM (%) Cost of Fund (%) Improvement in return ratios are on track ROE and ROA have remained subdued at 11.4% and 1.4% in FY16 and 10.3% and 1.3% in FY17, respectively due to asset quality hiccups. Although asset quality stress will impact near-term outlook, we expect the bank s core performance to improve over FY18E-20E mainly led by stable NIM along with higher operating efficiency. Thus, we expect the bank to deliver 13% CAGR in net profit over FY17-20E with RoE and RoA of 12% and 1.4%, respectively in FY20E. Return ratios to improve gradually over FY17-19E ROE (%) ROA (%) 0.0 Improving trend of underlying asset quality ICICI Bank s asset quality remained under pressure over last two years on the back of higher slippages from the bank s exposure to some of the stressed corporates. However, the bank reoriented its balance sheet mix towards less risky retail segment post FY12. As a result, the possibility of any incremental slippages outside these stressed accounts will be minimal in the future. It was already visible in Q3FY18 as Gross and Net non-performing assets (NPA) ratios improved by 24 and 34 bps sequentially to 8.6% and 4.6%, respectively. Further, management continues to guide for lower stress loan formation in FY19E as compared to FY18E. Moreover, the bank s net stressed assets (including watchlist) continued to decline and stood at ~8.8% as compared to 9.5% in Q2FY18 and 11.8% in Q3FY17 and PCR also improved further by 160 bps QoQ to 60.9%. Hence, we expect slippages to remain less volatile and to decline gradually which will help in improvement of Gross/Net NPA ratios to 6.3%/3.2% by FY20E.

5 1 8% 6% 4% 2% Asset quality stress to ease from FY18E 79.8% 76.1% % 48.8% 45.9% 48.7% 49.2% 37.9% 8.7% 8.5% 7.8% 5.8% 6.3% 5.4% 4.6% 3.6% 3.2% % % 0.7% 0.8% % GNPAs (%) NNPAs (%) PCR (%) Adequately capitalized to sustain medium term growth The Bank s capital adequacy ratio (CAR) as per Basel III norms continues to remain strong at 17.7% with Tier-I capital ratio of 14.6% as of Q3FY18. This will help the bank to grow its business further without raising fresh equity in the near to medium term. Given the Bank s current capital position, we don t expect the bank to raise fresh equity capital until FY20E. So, we don t foresee any material equity dilution. Notably, the bank has not raised equity capital over the last 10 years. Well capitalized to support growth momentum over FY17-20E % 18.7% 17.7% % 5.8% 5.9% 4.9% 4.2% 3.5% 17.4% % 2.9% 15.9% 15.3% 2.8% 2.7% % 12.8% 12.8% 12.8% 13.1% 14.4% 13.7% 13.1% 12.6% 0. Tier I (%) Tier II (%) CAR (%) Outlook and Valuation We like ICICI bank given its improving B/S mix with higher contribution from granular business (Retail) coupled with strong capitalization. Further, the bank s low divergence is a strong positive as it reflects that corporate healing is underway. The bank has also managed the volatility in stressed loans much better than any other private corporate bank. Hence, we maintain BUY rating on the stock with a target price (TP) of Rs382 using sum of the part (SOTP) methodology. From valuation perspective, life insurance and general insurance units are the two major subsidiaries of ICICI Bank. We value its standalone business at Rs280 (P/ABV of 1.8x for FY20E) and subsidiaries at Rs102.

6 SOTP Valuation Particulars Basis Multiple Year Value/Share ICICI Bank ABV 1.8 FY20E 280 Life Insurance Current Market Cap 52 General Insurance Proposed Transaction Value 32 Others FY20E 44 Total Value of Subsidiaries 128 ( holding discount) (26) Total Value 382 Key Risks: Increase in Slippages: We have factored the slippages of 4.4%, 3.5% and 2.5% for FY18E, FY19E and FY20E, respectively. Increase in Slippages beyond our estimates will deteriorate asset quality and will increase credit cost and hence affect the bottom line. Spike in Interest rates: We expect the interest rate (repo rate) will remain broadly stable over FY17-19E. However, any significant increase in interest rates will affect the margins of the bank and hence the operating matrix. Additionally, it will have negative impact on investments in capex, which may also impact adversely on the asset quality of the bank.

7 Profit & Loss Account (Standalone) Y/E (Rs. Cr) FY17 FY18E FY19E FY20E Interest Income 54,156 55,412 62,273 70,820 Interest Expense 32,419 32,349 35,927 40,854 Net Interest Income 21,737 23,063 26,346 29,966 Non Interest Income 19,504 15,211 16,416 19,004 Net Income 41,242 38,275 42,762 48,970 Operating Expenses 14,755 15,537 17,312 19,761 Total Income 73,661 70,623 78,689 89,825 Total Expenditure 47,174 47,886 53,238 60,616 Pre Provisioning Profit 26,487 22,738 25,451 29,209 Provisions 15,208 13,380 11,358 10,638 Profit Before Tax 11,279 9,358 14,093 18,571 Tax 1,478 1,432 3,424 4,513 Net Profit 9,801 7,926 10,668 14,058 Balance Sheet (Standalone) Y/E (Rs. Cr) FY17 FY18E FY19E FY20E Liabilities Capital 1,171 1,291 1,291 1,291 Reserves and Surplus 98, , , ,576 Deposits 490, , , ,193 Borrowings 147, , , ,795 Other Liabilities and Provisions 34,245 37,154 40,848 45,170 Total Liabilities 771, , ,175 1,064,025 Assets Cash and Balances 75,713 76,109 86,014 98,300 Investments 161, , , ,158 Advances 464, , , ,312 Fixed Assets 7,805 7,923 8,043 8,164 Other Assets 62,535 51,386 52,497 59,091 Total Assets 771, , ,175 1,064,025 Key Ratios (Standalone) Y/E FY17 FY18E FY19E FY20E Per share data (Rs.) EPS DPS BV ABV Valuation (%) P/E P/BV P/ABV Div. Yield Capital (%) CAR Tier I Tier II Asset (%) GNPA NNPA PCR Management (%) Credit/ Deposit Cost/ Income CASA Earnings (%) NIM ROE ROA

8 Rating Criteria Large Cap. Return Mid/Small Cap. Return Buy More than equal to 1 Buy More than equal to 15% Hold Upside or downside is less than 1 Accumulate* Upside between 1 & 15% Reduce Less than equal to -1 Hold Between & 1 * To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. * ICICIBANK is a large-cap company Disclaimer: Reduce/sell Less than The SEBI registration number is INH The analyst for this report certifies that all the views expressed in this report accurately reflect his / her personal views about the subject company or companies, and its / their securities. No part of his / her compensation was / is / will be, directly / indirectly related to specific recommendations or views expressed in this report. This material is for the personal information of the authorized recipient, and no action is solicited on the basis of this. It is not to be construed as an offer to sell, or the solicitation of an offer to buy any security, in any jurisdiction, where such an offer or solicitation would be illegal. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable, though its accuracy or completeness cannot be guaranteed. Neither Wealth India Financial Services Pvt. Ltd., nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. We and our affiliates, officers, directors, and employees worldwide: 1. Do not have any financial interest in the subject company / companies in this report; 2. Do not have any actual / beneficial ownership of one per cent or more in the company / companies mentioned in this document, or in its securities at the end of the month immediately preceding the date of publication of the research report, or the date of public appearance; 3. Do not have any other material conflict of interest at the time of publication of the research report, or at the time of public appearance; 4. Have not received any compensation from the subject company / companies in the past 12 months; 5. Have not managed or co-managed the public offering of securities for the subject company / companies in the past 12 months; 6. Have not received any compensation for investment banking, or merchant banking, or brokerage services from the subject company / companies in the past 12 months; 7. Have not served as an officer, director, or employee of the subject company; 8. Have not been engaged in market making activity for the subject company; This document is not for public distribution. It has been furnished to you solely for your information, and must not be reproduced or redistributed to any other person. Contact Us: Funds India Uttam Building, Third Floor No. 38 & 39 Whites Road Royapettah Chennai T: contact@fundsindia.com

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