Steady quarter, margin outlook seems more than cautious January 25, 2011 Abhijit Majumder abhijitmajumder@plindia.com +91 22 66322236 Umang Shah umangshah@plindia.com +91 22 66322242 Rating BUY Price Rs1,084 Target Price Rs1,377 Implied Upside 27. Sensex 19,151 (Prices as on January 24, 2011) Trading data Market Cap. (Rs bn) 1,209.0 Shares o/s (m) 1,114.9 3M Avg. Daily value (Rs m) 5905.9 Major shareholders Promoters 0.0 Foreign 39.23% Domestic Inst. 23.43% Public & Other 37.34% Healthy operating performance, stable asset quality: s PAT grew by 30.5% YoY and 16.2% QoQ to Rs14.4bn, above our as well as street expectations, on account of healthy Net Interest Income (NII) growth and lower credit costs during the quarter. NII at Rs23.1bn grew by 12.3% YoY and 4.9% QoQ on account of 15.3% YoY and 6.4% QoQ increase in advances, coupled with stable reported margins at 2.6%. However, the interest income during the quarter includes interest on income tax refund to the tune of Rs0.53bn, adjusting for which margins could have been slightly lower by ~5bps. Despite lending rate hikes increase in overall yields remains restricted on account of Rs143.9bn worth investments in the low yielding RIDF bonds, which pull down the overall yields. Deposits grew by 10.2% YoY but declined 2.4% QoQ. CASA ratio remained largely stable QoQ at ~44% as CASA deposits declined marginally by 1.9% QoQ. Healthy 2.1% QoQ increase in savings bank deposits was offset by a 9.3% QoQ decline in the current account balances due to unavailability of IPO floats, available in the previous quarter. Fee income grew by 14.3% YoY and 2.2% QoQ. However, mark to market losses in some of the equity and proprietary investments resulted in negligible treasury gains. Employee expenses increased steeply by 21.8% QoQ on the back of certain provisions towards employee benefits provided for coupled with the full 90day impact of the costs of BoR employees. GNPAs remained largely flattish QoQ, while provision coverage improved to 71.8% from 69% in. No fresh restructuring was done during the quarter resulting into a marginal 1. QoQ decline in the outstanding restructured portfolio to Rs25.6bn (1.2% of advances v/s 1.3% of advances in ). Result Update Stock Performance (%) 1M 6M 12M Absolute (3.0) 18.8 29.0 Relative 1.6 13.2 15.4 Price Performance (RIC: ICBK.BO, BB: ICICIBC IN) Key financials ( Y/e March) 2010 2011E 2012E 2013E Net interest income (Rs m) 81,144 83,256 103,055 125,769 Growth (%) (3.0) 2.6 23.8 22.0 Operating profit (Rs m) 97,322 91,719 113,990 138,861 PAT (Rs m) 40,250 51,494 68,583 80,830 EPS (Rs) 36.1 46.0 61.3 72.3 Growth (%) 6.9 27.5 33.2 17.9 Net DPS (Rs) 9.5 9.5 9.5 9.5 (Rs) 1,400 1,200 1,000 800 600 400 200 0 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Source: Company Data; PL Research Profitability & Valuation 2010 2011E 2012E 2013E NIM (%)* 2.2 2.2 2.4 2.5 RoAE (%) 8.0 9.6 11.8 12.5 RoAA (%) 1.1 1.3 1.6 1.5 P / BV (x)** 2.6 2.3 1.8 1.5 P / ABV (x)** 2.7 2.3 1.9 1.5 PE (x)** 26.3 19.4 13.0 10.2 Net dividend yield (%) 0.9 0.9 0.9 0.9 Source: Bloomberg Source: Company Data; PL Research * calculated on average assets ** Refer Page 7 Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Consolidated profit growth strong on the back of change in accounting policy in life insurance business: s consolidated PAT grew strongly by 77.5% YoY and 46.2% QoQ on account of transfer of Rs3.8bn worth surplus from nonparticipating policyholder s funds due to the change in IRDA guidelines. Securities business reported a healthy 20.7% QoQ increase in profits, although it declined by 5.4% YoY. ICICI Venture too reported a strong increase in bottomline, while the profit growth for the general insurance and AMC businesses remained sluggish. Valuations and Outlook: continues to deliver on its guided strategy of improving on 5C s. While the balance sheet growth has returned, the margins are likely to remain under pressure, which is line with the industry trend. We factor in margin compression for coming few quarters as the bank would likely mobilize higher low yielding agri and rural assets to meet the priority sector targets in the current quarter, which could keep yields under pressure. However, in the medium term we expect margins to improve as incremental spreads on overseas assets expand; domestically bank could focus on mobilizing high yielding assets and as part of the asset book gets re priced with a lag. All these factors together should provide some cushion to margins from Q2FY12 onwards. We are revising our earnings estimates upwards by 5.8% for FY11 as we lower our credit cost assumptions for the year, given that the bank holds excess standard asset provisions to the tune of Rs4.0bn on its balance sheet. This coupled with early achievement of the 7 provision cover (v/s March 2011 deadline) should reduce the pressure on earnings in the current quarter. Although concerns over margins could act as an overhang on the stock in the near term, we maintain our positive view on the stock from a medium to long term perspective. We maintain our BUY rating on the stock and marginally revise our price target upwards to Rs1,377 from Rs1,365 earlier. January 25, 2011 2
Result Overview (Rs m) Y/e March YoY gr. (%) 9MFY11 9MFY10 YoY gr. (%) Interest Income 66,960 60,896 10.0 63,091 188,176 198,800 (5.3) Interest on Advances 41,620 39,764 4.7 39,492 118,897 135,560 (12.3) Income on investments 21,212 16,913 25.4 19,161 56,959 48,954 16.4 Bal with RBI & others 4,128 4,219 (2.2) 4,438 12,320 14,286 (13.8) Interest Expense 43,842 40,315 8.7 41,047 123,104 138,005 (10.8) Net Interest Income 23,117 20,581 12.3 22,044 65,072 60,794 7.0 Non Interest Income 17,488 16,731 4.5 15,779 50,072 55,868 (10.4) Net total Income 40,605 37,312 8.8 37,823 115,144 116,662 (1.3) Operating Expenses 17,179 13,624 26.1 15,704 47,718 43,329 10.1 Employee 7,605 4,270 78.1 6,243 19,603 13,431 46.0 Other operating expenses 9,575 9,354 2.4 9,461 28,115 29,899 (6.0) Operating profit 23,426 23,688 (1.1) 22,119 67,426 73,333 (8.1) Provisions 4,643 10,022 (53.7) 6,411 19,032 33,971 (44.0) Profit before tax 18,783 13,667 37.4 15,708 48,394 39,362 22.9 Tax 4,413 2,656 66.1 3,345 11,401 9,168 24.4 Net Profit after tax 14,370 11,011 30.5 12,363 36,993 30,194 22.5 Asset Quality Gross NPA's 101,866 89,256 14.1 101,412 101,866 89,256 14.1 Gross NPA's % 4.8 4.8 5.0 4.8 4.8 Net NPA's 28,727 43,568 (34.1) 31,452 28,727 43,568 (34.1) Net NPA's % 1.4 2.4 1.6 1.4 2.4 Provision Coverage 71.8 51.2 69.0 71.8 51.2 4026.8 Capital Adequacy (%) CAR 20.0 19.4 20.2 20.0 19.4 Tier 1 13.7 14.2 13.8 13.7 14.2 NIM reported (%) 2.6 2.6 2.6 2.6 2.5 NIM calculated (%) 2.4 2.3 2.3 2.3 2.2 Balance Sheet Items Deposits 2,177,468 1,976,529 10.2 2,230,940 2,177,468 1,976,529 10.2 CASA 962,000 782,470 22.9 981,050 962,000 782,470 22.9 CASA (%) 44.2 39.6 44.0 44.2 39.6 Advances 2,066,920 1,792,691 15.3 1,942,010 2,066,920 1,792,691 15.3 Investments 1,337,027 1,234,090 8.3 1,362,750 1,337,027 1,234,090 8.3 Total Assets 3,928,970 3,562,284 10.3 3,899,980 3,928,970 3,562,284 10.3 January 25, 2011 3
Margins remained stable QoQ to 2.6%, Trend in margins and CASA including the impact of Rs0.53bn worth interest on income tax refund. Adjusting for the same, the margins could have contracted by ~5bps. CASA deposits declined marginally by 1.9% QoQ, while the CASA ratio remained largely stable at ~44% aiding margin stability. 2.7 2.6 2.6 2.5 2.5 2.4 2.4 2.3 2.3 2.2 50. 45. 40. 35. 30. 25. 20. 15. 10. 5. 0. Q3 FY09 Q4 FY09 Q1 FY10 Q2FY10 (%) CASA ratio (RHS) NIM The balance sheet continued to expand on sequential basis, albeit at a slower pace by 1. QoQ. However, advances growth stood healthy as it grew by 15.3% YoY and 6.4% QoQ. Deposits growth during the quarter was sluggish with deposits growing by 10.2% YoY, but declining by 2.4% QoQ. Trend in advances and deposit growth 15% 1 5% 5% 1 15% Deposit Growth YoY Loan Growth YoY Q3 FY09 Q4 FY09 Q1 FY10 Q2FY10 The retail loan continues to contract on a YoY basis, while it expanded marginally by 1.1% QoQ. Of the overall retail portfolio, commercial vehicle loans grew at a healthy pace as it grew by 7.8% QoQ. As a result the proportion of CV loans in the overall portfolio increased to 16% from 15% in the previous quarter. Retail loans portfolio split 10 9 8 7 6 5 4 3 1 2% 2% 2% 3% 2% 6 6 62% 65% 66% 6% 5% 7% 6% 5% 5% 4% 4% 4% 3% 25% 27% 26% 24% 25% Others Mortgages Credit cards Personal loans Auto Loans January 25, 2011 4
Trend in asset quality GNPAs during the quarter remained largely 120 GNPA (Rs bn) NNPA (Rs bn) NNPA (%) (RHS) 3.0 stable, as it registered a negligible 0.4% QoQ increase. Provision coverage ratio improved to 71.8% from 69% in. The bank has already achieved the 7 provision coverage guideline, which it had to by March 2011. 100 80 60 40 20 2.5 2.0 1.5 1.0 0.5 Restructured loans too were lower by 0 0.0 ~0.6% QoQ to Rs25.6bn or 1.2% of advances. Q3 FY09 Q4 FY09 Q1 FY10 Q2FY10 Snapshot of subsidiary performance (Rs bn) Particulars % YoY Gr. % QoQ Gr. Remarks Profitability improves sequentially, though weak YoY, in ICICI Sec 0.35 0.37 5.4% 0.29 20.7% line with industry trend ICICI Sec PD 0.04 0.16 75. 0.02 Primary dealership reported a net loss of Rs40mn during NM the quarter as against net loss Rs20mn in ICICI Venture 0.38 0.09 322.2% 0.22 ICICI Venture reported strong bottomline growth both on 72.7% a YoY as well as on a QoQ basis ICICI AMC 0.06 0.40 85. 0.14 AMC business reported weak numbers both on a YoY as 57.1% well as QoQ basis ICICI Home Finance 0.50 0.44 13.6% 0.54 Although earnings improve YoY, it declined on a QoQ 7.4% basis January 25, 2011 5
Overseas banking subsidiaries Total assets of UK and Canada banking subsidiaries stood at US$7.0bn and US$4.6bn, respectively. Assets of the UK and Canadian subsidiary declined by 2.8% and 5.9% on a QoQ basis respectively. Importantly, balance sheets of both subsidiaries remained fairly liquid with proportion of cash and liquid assets remaining fairly stable QoQ. Asset profile UK subsidiary (US$7.0bn) Asset profile Canadian subsidiary (US$4.6bn) 10 Other assets 10 Other assets 8 ABS 8 ABS 6 4 Bonds India linked investments loans & advances 6 4 Bonds India linked investments loans & advances Cash & liquid assets Cash & liquid assets Asset profile Eurasia (US$274mn) After contracting for nearly three consecutive quarters, the asset base for the Russian subsidiary expanded by 33.9% QoQ to US$367mn. The steep increase has been in cash and liquid assets, the proportion of which has increased from 18% in to 46% currently. Capital adequacy reduced to 31.8% from 37.7% in. 10 9 8 7 6 5 4 3 1 Other assets Retail loans Cash & liquid securities Corporate bonds Loans to corporates January 25, 2011 6
SOTP Valuation Business Basis Multiple FY12E Value per share % of SOTP FY13E Value per share % of SOTP Standalone Core Banking ABV* 2.3 964 77.1% 1,074 75.7% ICICI Prudential Life Ins. Appraisal Value 123 9.9% 148 10.5% ICICI Lombard General Ins. Earnings 12 10 0.8% 12 0.9% ICICI Securities (combined) Earnings 13 43 3.4% 51 3.6% ICICI Venture Funds AUMs 8% 7 0.6% 9 0.6% Pru ICICI Asset Mgt AUMs 5% 14 1.1% 17 1.2% Home finance company BV 1.8 16 1.2% 19 1.3% International banking subsidiaries BV 1.5 74 6. 89 6.3% Total 1,251 100. 1,419 100. 12 month forward price target based on 25% of FY12E & 75% of FY13E price targets above **Rs114 and Rs125 per share reduced for investment in subsidiaries from Book Value & Rs287& Rs345 per share reduced from the CMP for value of subsidiary for FY12 and FY13 respectively. We have also applied a 15% holding company discount. January 25, 2011 7
Income Statement (Rs m) Int. Earned from Adv. 173,727 165,970 210,660 249,178 Int. Earned from Invt. 64,664 85,374 97,986 115,880 Others 18,679 14,141 17,175 19,167 Total Interest Income 257,069 265,486 325,821 384,225 Interest expense 175,926 182,230 227,766 263,457 NII 81,144 83,256 103,055 125,769 Growth (%) (3.0) 2.6 23.8 22.0 Treasury Income 7,316 69 3,185 5,000 NTNII 67,460 69,525 82,504 99,675 Non Interest Income 74,777 69,594 85,690 104,675 Total Income 331,846 335,079 411,511 488,901 Growth (%) (14.2) 1.0 22.8 18.8 Operating Expense 58,598 61,130 74,756 91,584 Operating Profit 97,322 91,719 113,990 138,861 Growth (%) 9.0 (5.8) 24.3 21.8 Total Provisions 43,899 23,964 21,311 26,597 PBT 53,423 67,755 92,679 112,264 Tax Provisions 13,173 16,261 24,097 31,434 Effective Tax Rate (%) 24.7 24.0 26.0 28.0 PAT 40,250 51,494 68,583 80,830 Growth (%) 7.1 27.9 33.2 17.9 Balance Sheet (Rs m) Par Value 10 10 10 10 No. of equity shares 1,115 1,118 1,118 1,118 Equity 11,149 11,183 11,183 11,183 Networth 516,184 555,282 611,434 679,834 Adj. Networth 477,772 525,235 583,498 646,024 Deposits 2,020,166 2,383,796 2,860,555 3,432,666 Growth (%) (7.5) 18.0 20.0 20.0 Low Cost deposits 842,158 905,842 1,087,011 1,338,740 % of total deposits 41.7 38.0 38.0 39.0 Total Liabilities 3,633,997 4,016,464 4,630,634 5,523,926 Net Advances 1,812,056 2,155,580 2,595,418 3,141,150 Growth (%) (17.0) 19.0 20.4 21.0 Investments 1,208,928 1,263,412 1,401,672 1,647,680 Total Assets 3,633,997 4,016,464 4,630,634 5,523,926. Quarterly Financials (Rs m) Y/e March Interest Income 58,270 58,125 63,091 66,960 Interest Expense 37,920 38,215 41,047 43,842 Net Interest Income 20,349 19,911 22,044 23,117 Non Interest Income 18,908 16,805 15,779 17,488 CEB 15,210 14,130 15,900 16,250 Treasury 1,960 1,040 (1,440) 210 Net Total Income 39,258 36,716 37,823 40,605 Operating Expenses 15,269 14,835 15,704 17,179 Employee Expenses 5,827 5,756 6,243 7,605 Other Expenses 9,442 9,079 9,461 9,575 Operating Profit 23,989 21,881 22,119 23,426 Core Operating Profit 22,029 20,841 23,559 23,216 Provisions 9,898 7,978 6,411 4,643 Loan loss provisions Investment Depreciation Profit before tax 14,091 13,903 15,708 18,783 Tax 4,036 3,643 3,345 4,413 PAT before EO 10,056 10,260 12,363 14,370 Extraordinary item PAT 10,056 10,260 12,363 14,370 Key Ratios CMP (Rs) 1,084 1,084 1,084 1,084 Equity Shrs. Os. (m) 1,115 1,118 1,118 1,118 Market Cap (Rs m) 1,209,042 1,212,750 1,212,750 1,212,750 M/Cap to AUM (%) 33.3 30.2 26.2 22.0 EPS (Rs) 36.1 46.0 61.3 72.3 Book Value (Rs) 463 497 547 608 Adj. BV (75%) (Rs) 450 492 543 603 P/E (x) 26.3 19.4 13.0 10.2 P/BV (x) 2.6 2.3 1.8 1.5 P/ABV (x) 2.7 2.3 1.9 1.5 DPS (Rs) 9.5 9.5 9.5 9.5 Dividend Yield (%) 0.9 0.9 0.9 0.9 Profitability (%) NIM 2.2 2.2 2.4 2.5 RoAA 1.1 1.3 1.6 1.5 RoAE 8.0 9.6 11.8 12.5 Efficiency Cost Income Ratio (%) 37.6 40.0 39.6 39.7 C D Ratio (%) 89.7 90.4 90.7 91.5 Business per Emp. (Rs m) 109 153 165 179 Profit per Emp. (Rs m) 11 17 21 22 Business per Branch (Rs m) 2,245 2,444 2,718 3,048 Profit per Branch (Rs m) 24 28 34 37 Asset Quality Gross NPAs (Rs m) 94,806 100,156 93,121 112,701 Net NPAs (Rs m) 38,411 30,047 27,936 33,810 Gr. NPAs to Gross Adv. (%) 5.1 4.5 3.5 3.5 Net NPAs to Net Adv. (%) 2.1 1.4 1.1 1.1 NPA Coverage (%) 59.5 70.0 70.0 70.0. January 25, 2011 8
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage 6 5 4 3 1 53.8% 30.3% 13.6% 2.3% Buy Accumulate Reduce Sell PL s Recommendation Nomenclature BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 1 absolute upside in 1 month Trading Sell : Over 1 absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. For Clients / Recipients in United States of America: All materials are furnished courtesy of Direct Access Partners LLC ("DAP") and produced by Prabhudas Lilladher Pvt. Ltd. ("PLI"). This material is for informational purposes only and provided to Qualified and Accredited Investors. You are under no obligation to DAP or PLI for the information provided herein unless agreed to by all of the parties. Additionally, you are prohibited from using the information for any reason or purpose outside its intended use. Any questions should be directed to Gerard Visci at DAP at 212.850.8888. January 25, 2011 9