COMPANY UPDATE Saday Sinha saday.sinha@kotak.com +91 22 6621 6312 ICICI BANK PRICE: RS.315 RECOMMENDATION: BUY TARGET PRICE: RS.400 FY17E P/E: 12.3X, P/ABV: 1.8X ICICI bank is well positioned to ride the gradual path of economic improvement, given its robust liability franchise, comfortable core capital, healthy NIM and resilient retail portfolio, despite rise in fresh delinquencies in recent quarters. We believe management's focus on stable growth with improving structural profitability is likely to continue. Its ALM suggests that a larger share of deposits vis-à-vis loans would come for re-pricing in falling interest rate environment, thus helping the bank in protecting its margin. Stock trades at reasonable valuation (1.4x FY17 ABV, after stripping the value for subsidiaries). We do take cognizance of likely improvement in its return ratios in next two years (RoE: ~16% by FY17). Hence, we retain BUY rating on the stock with tweaked TP of Rs.400 (Rs.402 earlier) using SOTP method, where the value of its standalone business comes to Rs.324 (1.9x FY17E ABV) and the value of subsidiaries at Rs.76 (holding company discount: 20% to the fair value of its subsidiaries at Rs.94). Improvement in its ALM bodes well for the stock in the falling interest rate environment ICICI bank has continued to witness improvement in its ALM with rise in share of deposits in 3 Yr - 5 Yr and > 5 Yr maturity buckets. Now, the share of both these buckets stand at 26-27% each, which used to be only ~2% till FY11. We are of the view that ICICI bank is better placed in protecting its margin in the falling interest rate environment, as the share deposits in <1 Yr bucket stands at 32.4% in FY15, while share of advances in the same bucket stands at 26.7%. It implies a larger amount of deposits would come for re-pricing at lower rates, thus helping the bank in containing its cost of funds. Trend in deposit maturity profile Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2
Trend in advances maturity profile Liability franchise is one of the best in the industry. We are modeling NIM to come at 3.5% during FY16/17E ICICI bank's robust liability franchise has helped over the years to reduce its funding costs. During FY15, even though the banking system was witnessing migration of CASA deposits, ICICI bank's average CASA share saw improvement to 39.5% in FY15 as compared to 39.4% in FY14. Muted growth in term deposits has also partly aided the improvement in its CASA mix (45.5% in Q4FY15). Trend in Deposit growth Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Deposits (bn) 2,677.9 2,814.4 2,864.2 2,926.1 2,911.9 3,090.5 3,169.7 3,319.1 3,357.7 3,520.6 3,553.4 3,615.6 Saving deposits 779.2 806.2 814.6 856.5 888.5 935.4 957.2 991.3 1,027.4 1,056.1 1,105.3 1,148.6 Current deposits 307.5 338.0 356.7 369.3 369.8 403.7 414.4 432.5 416.8 481.2 459.2 495.2 CASA 1,086.8 1,144.2 1,171.4 1,225.8 1,258.3 1,339.1 1,371.7 1,423.8 1,444.1 1,537.3 1,564.5 1,643.8 Term deposits 1,591.2 1,670.2 1,692.8 1,700.4 1,653.5 1,751.4 1,798.0 1,895.3 1,913.5 1,983.3 1,988.9 1,971.8 CASA (%) 40.6% 40.7% 40.9% 41.9% 43.2% 43.3% 43.3% 42.9% 43.0% 43.7% 44.0% 45.5% NIM improved 15bps to 3.48% in FY15, largely driven by 22bps expansion in domestic margin (3.90% in FY15) due to increase in the yield on interest-earning assets and a decrease in the cost of funds. Yield on assets saw improvement primarily due to rise in the yield on SLR portfolio (18bps YoY) even though non- SLR portfolio witnessed decline in yields. Expansion in yield on SLR portfolio can be attributed to change in mix with increase in higher yielding HTM paper while lower yielding shorter tenure papers were sold/matured. The cost of borrowings declined 23bps to 6.16% in FY15, primarily due to an increase in foreign currency bond borrowings. Nonetheless, strong accretion to low cost deposits has also partly aided in the decline of cost of funds - 6.17% in FY15 as compared to 6.21% in FY14. NIM of overseas portfolio declined marginally to 1.65% in FY15 from 1.71% in FY14. Even though ICICI bank has cut the base rate by 25bps in April 15, lower cost of funds (albeit with a lag) would help it maintain NIM at current levels. Hence, we are modeling NIM to come at ~3.5% during FY16/17E. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
Trend in Yield on assets, Cost of funds, Spread & NIM FY12 FY13 FY14 FY15 Yield on Assets 8.53% 8.97% 8.92% 8.96% YoA 9.55% 9.94% 10.00% 9.95% YoI 7.24% 7.73% 7.48% 7.47% SLR 7.34% 7.80% 7.83% 8.01% Non-SLR 7.10% 7.62% 6.89% 6.60% Cost of Funds 6.33% 6.43% 6.21% 6.17% CoD 6.12% 6.38% 6.11% 6.18% Term Deposits 8.21% 8.47% 8.15% 8.25% CASA Deposits 2.87% 2.97% 2.99% 3.00% CoB 6.71% 6.54% 6.39% 6.16% Interest spread 2.20% 2.54% 2.71% 2.79% NIM 2.73% 3.11% 3.33% 3.48% Strong disbursements in retail segment continued; proportion of secured portfolio remained healthy at ~84% in FY15. Strong retail asset disbursements continued during FY15 primarily by the strong growth in secured assets. Disbursements in mortgage and auto loan segments grew at 33% and 20%, respectively, during FY15. ICICI bank reported a healthy 14.4% YoY loan growth, mainly driven by strong growth in retail book (24.4% YoY) while domestic corporate (9.5% YoY) and SME (3.2% QoQ; 14.1% YoY on low base) saw calibrated growth. Break-up of advances (%) - New Classification Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Retail Business 36.0% 36.2% 36.7% 39.0% 39.6% 39.8% 40.9% 42.5% Domestic Corporate (includes builder finance) 32.5% 32.6% 31.5% 30.1% 30.4% 30.0% 29.0% 28.8% SME 4.6% 4.6% 4.3% 4.4% 4.4% 4.5% 4.4% 4.4% Overseas Branches 26.9% 26.6% 27.5% 26.5% 25.6% 25.7% 25.7% 24.3% Trends in loan book (New Classification) (Rs Bn) Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 YOY (%) QoQ (%) Advances 3,013.7 3,177.9 3,326.3 3,387.0 3,470.7 3,617.6 3,753.5 3,875.2 14.4% 3.2% Retail Business 1,085.0 1,151.0 1,222.0 1,321.0 1,372.0 1,441.0 1,535.0 1,644.0 24.4% 7.1% Domestic Corporate 979.5 1,036.0 1,047.8 1,018.8 1,055.1 1,085.3 1,088.5 1,116.1 9.5% 2.5% SME 138.6 146.2 143.0 149.4 152.7 162.8 165.2 170.5 14.1% 3.2% Overseas Branches 810.7 845.3 914.7 881.5 888.5 929.7 964.6 941.7 6.8% -2.4% Strong growth in retail book has been contributed by housing (26.2% YoY), auto (23.5% YoY) and PL (74.4% YoY) segments. However, management has adopted the calibrated approach for the CV business which continued to decline (12.6% YoY) on back of run-down of bought loan portfolio. PL segment continued to grow faster and this has led to increase in its share in retail portfolio from 3.0% in FY14 to 4.2% in FY15. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4
Trend in retail loan book Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 YOY (%) QoQ (%) Rs. Bn 1085.0 1151.0 1222.0 1320.0 1372.0 1441.0 1535.0 1644.0 24.5% 7.1% Vehicle Loans 246.3 255.5 259.1 275.9 278.5 278.1 296.3 295.9 7.3% -0.1% Auto 110.7 120.9 134.4 151.8 161.9 167.2 178.1 187.4 23.5% 5.3% CV 135.6 134.7 124.6 124.1 116.6 111.0 118.2 108.5-12.6% -8.2% Housing 595.7 630.7 666.0 706.2 742.3 792.6 844.3 891.0 26.2% 5.5% Business Banking 62.9 70.2 72.1 79.2 76.8 83.6 81.4 93.7 18.3% 15.2% PL 18.4 24.2 30.6 39.6 46.6 53.3 64.5 69.0 74.4% 7.1% Credit Cards 30.4 31.1 31.8 33.0 35.7 36.0 38.4 39.5 19.6% 2.8% Others 131.3 139.3 162.5 186.1 192.1 197.4 219.5 254.8 36.9% 16.1% Management has been guiding us about growing domestic loan book by few percentages (200-300bps) faster than the system primarily driven by strong growth in retail segment while domestic corporate book as well as overseas book are likely to witness calibrated approach. The proportion of secured advances remained healthy at ~84% at the end of FY15, which used to be in 70's only till few years back. Share of off-balance sheet items remained stable; although fresh impairments have risen during last 2 quarters, management is guiding of lower impairments during FY16. The share of contingent liability to assets has remained stable (YoY) at ~130% in FY15 as compared to 2.0-2.3x seen during FY10-11, largely due to decline in outstanding notional/principal contracts in foreign exchange contracts, interest rate swaps/futures and currency options/swaps. The fresh loan impairments (gross slippage + new restructuring) during previous two quarters have remained high, which could be a near term overhang on the stock performance. Rs.32.6 bn slipped into NPA (including Rs.22.5 bn slippage from restructured book) and Rs.12.5 bn worth of loans were restructured during Q4FY15 which implies fresh impairment at Rs.22.6 bn (excluding slippage from restructured book). Trends in NPAs (Rs. Bn) Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Gross NPAs 100.1 100.3 104.0 105.1 108.4 115.5 130.8 150.9 Gross NPAs (%) 3.23% 3.08% 3.05% 3.03% 3.05% 3.12% 3.40% 3.78% Net NPAs 24.6 27.0 31.2 33.0 34.3 39.4 47.7 62.6 Net NPAs (%) 0.82% 0.85% 0.94% 0.97% 0.99% 1.09% 1.27% 1.61% Cumulative Provisions 75.9 73.7 73.3 72.5 75.3 77.0 84.0 89.2 Outstanding Std assets provisions 16.07 17.55 18.49 19.32 20.36 21.30 22.70 23.34 Provision Coverage Ratio (%) 75.4% 73.1% 70.0% 68.6% 68.4% 65.9% 63.5% 58.6% During Q4FY15, up-gradation/cash recovery was also lower at ~20% of gross slippage as against the run-rate of ~35% seen during FY14. In percentage terms, GNPA/NNPA deteriorated to 3.8% and 1.6%, respectively while in percentage terms both rose 15.4% and 31%, respectively. Management had guided earlier that incremental stress build-up during FY16 would be lower than that of FY15. They had also indicated that credit cost during FY16 is likely to be in the range of 90-95bps. Higher slippage from restructured book has led to decline in outstanding restructured portfolio (Rs.110.2 bn; 2.8% of advances), lower than the industry average. Apart from this, sequential decline in provision coverage ratio (~500bps QoQ), does not bode well for the stock. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5
Movement of NPA (Rs Bn) Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Opening balance 96.5 100.6 100.8 104.5 105.5 110.0 117.0 132.3 Slippage 11.2 11.5 12.3 12.4 12.0 16.7 22.8 32.6 Upgrade + Recovery 3.1 5.7 3.6 4.2 3.6 4.4 5.1 6.5 W/O & sale 4.0 5.6 5.0 7.2 3.9 5.4 2.4 6.0 Closing balance 100.6 100.8 104.5 105.5 110.0 117.0 132.3 152.4 Trends in NPLs Rs. Bn Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Retail - Gross NPA 54.1 49.1 44.4 41.2 37.9 35.9 34.9 33.8 Corporate - Gross NPA 46.5 51.7 60.1 64.4 72.1 81.0 97.4 118.6 Retail - Net NPA 7.8 7.6 7.9 8.2 8.5 8.9 9.3 9.9 Corporate - Net NPA 17.0 19.5 23.3 24.8 26.3 31.1 39.0 53.4 The share of retail portfolio in GNPA has fallen from 39% in Q4FY14 to 22% in Q4FY15, on back of fresh delinquencies coming primarily from SMEs and mid corporate. Provisions rose 88.4% YoY to Rs.13.5 bn with credit cost coming at ~146bps in Q4FY15, much above the management's guidance of 90bps (FY15), which also includes 5-6bps on account of provision on un-hedged forex exposure. Healthy NIM and opex containment are likely to provide sufficient cushion to its earnings profile with marginal higher credit costs during FY16, in our view. Valuation and Recommendation At CMP, stock trades reasonable at 12.3x its FY17E earnings and 1.8x its FY17E ABV (9.4x and 1.4x, respectively, after stripping the value for subsidiaries). We have tweaked the earnings estimates for FY16/17E and expect net income to grow 15.1% CAGR during FY15-17E. 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). Sum of Parts Valuation based on FY17E Basis Multiple Value / Share (Rs) Core Banking Business (Standalone) ABV 1.90 324 Overseas Banking Subsidiaries ABV 1.00 19 Life Insurance Business EV + NBAP 12 37 Non-Life Insurance PAT 10 10 ICICI Securities PAT 10 5 ICICI PD Business PAT 10 6 Asset Management AUM 5% 7 Private Equity AUM 10% 3 Home Finance ABV 2.5 8 Total Value of subsidiaries 94 20% discounted value 76 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 tweaked TP of Rs.400 (Rs.402 earlier) using SOTP method, where the value of its standalone business comes to Rs.324 (1.9x FY17E ABV) and the value of subsidiaries at Rs.76 (holding company discount: 20% to the fair value of its subsidiaries at Rs.94). Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6
Key data (Rs. bn) FY14 FY15 FY16E FY17E Interest income 441.8 490.9 549.1 632.2 Interest expense 277.0 300.5 328.3 379.2 Net interest income 164.8 190.4 220.8 253.0 Growth (%) 18.8% 15.6% 16.0% 14.6% Other income 104.3 121.8 127.6 148.0 Gross profit 165.9 197.2 220.1 256.7 Net profit 98.1 111.8 124.4 148.0 Growth (%) 17.8% 13.9% 11.3% 19.0% Gross NPA (%) 3.1 3.9 3.7 3.2 Net NPA (%) 1.0 1.6 1.5 1.1 Net interest margin (%) 3.2 3.4 3.5 3.4 CAR (%) 17.7 17.0 17.1 16.6 RoE (%) 14.0 14.5 14.7 15.6 RoA (%) 1.7 1.8 1.8 1.9 Dividend per share (Rs.) 4.6 5.0 5.5 6.0 EPS (Rs) 17.0 19.3 21.5 25.5 Adjusted BVPS (Rs) 125.6 136.5 151.5 170.6 P/E (x) 18.5 16.3 14.7 12.3 P/ABV (x) 2.5 2.3 2.1 1.8 Source: Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 7