ICICI Bank (Q1 FY12) – BUY

CMP Rs1,038, TargetRs1,250, Upside 20.5%

• Reasonably strongbusiness growth continues; bank lowers loan growth target to 18%

• NIM was resilient despite steep increase infunding cost; margin to gradually improve in the medium term

• C/I ratio continues tobe elevated; consistent strength in asset quality was the key highlight    

• Capital adequacystands robust; RoA impressive at 1.4%

• Consistent strongperformance calls for a valuation re-rating; upgrade to BUY

Result table

Source: Company, India Infoline Research. *calculated

Reasonablystrong business growth continues; bank lowers loan growth target to 18%

ICICI Bank’s advances continued to grow strongly at 20% yoy in Q1 FY12.On sequential basis, loan book expansion was modest at 2%. Corporate (13.5% qoqand 42% yoy) and SME (6.2% qoq and 50% yoy) segments were the key growth drivers.On the corporate side, growth was led by strong traction in working capitalloans. Retail loan growth continue to remain weak (-1.2% qoq and 10% yoy) whilerural credit growth was sluggish on account of seasonality (-11% qoq and 13%yoy). Within Retail segment, personal loans and credit cards portfolio continueto shrink significantly. Factoring a slower systemic credit growth, ICICI Bankhas lowered its loan growth target for the year to 18% from earlier 20%+. Bank’sdeposits grew in-line with advances on sequential basis at 2.2% but lower onyoy basis at 15%. The terminal CASA ratio declined steeply from 45.1% in Q4FY11 to 41.9% in Q2 FY12 solely driven by a sharp 15% decline in currentdeposits (savings deposits were flat qoq). However, average CASA ratio for the quarterat 40% was marginally higher than 39.5% in the previous quarter. The bank isconfident of sustaining average CASA at 40% throughout the year. Growth in termdeposits was strong on qoq basis at 8% with reliance on bulk depositsincreasing to near 35%. C/D was stable at 96%.                                  

NIM was resilient despitesteep increase in funding cost; margin to gradually improve in the medium term

ICICIBank’s NIM was resilient at 2.6% (slightly came-off on qoq basis) despite increasedreliance on bulk deposits and material spike in deposit rates over the past fewmonths. Quarterly NIM has been steady in the range of 2.5-2.7% over the lastcouple of years aided by structural improvement in CASA ratio. During Q1 FY12,timely and commensurate increase in lending rates (computed YoA improved by60bps qoq) helped in sustaining margin other than a marginally higher average CASA.We expect bank’s NIM to gradually improve from here with beneficial re-pricingof wholesale deposits, stable CASA and reasonably strong pricing power. Bank’sis contemplating an increase in Base Rate in response to the recent rate hikeby RBI. With liquidity position comfortable currently and strong depositmobilization at existing rates, bank has no plan of raising deposit rates inthe near-term.

C/I ratio continues to beelevated; consistent strength in asset quality was the key highlight    

Other income performancewas weak with fee income growing behind balance sheet (12% yoy) and higherinterest rates impacting treasury income (in red for second consecutivequarter). Overall opex increased by 23% yoy on account of steep growth inemployee cost (27% yoy) which in-turn was driven by significant recruitmentover the past few quarters. The C/I ratio remained elevated at 45%. The mostpositive highlight of the bank’s performance was continued improvement in assetquality. Absolute GNPLs were flat both on qoq and yoy basis. Fresh addition toGNPL was modest at ~Rs2.5bn (0.5% delinquency ratio) mainly comprising ofslippage (Rs2bn) from the bought-out MFI portfolio. Exposure to MFI has now declinedto below Rs10bn (~0.5% of advances). Restructured loans (marginal 0.9% ofadvances) were stable on sequential basis manifesting no meaningfulrestructuring done during the quarter. Overall provisioning stood at Rs4.5bnincluding Rs1.45bn additional provisioning (one-time in nature) on sub-standardand doubtful assets to meet the enhanced requirement stipulated by RBI in May. NetNPL ratio and PCR were stable at 0.9% and 77% respectively.                                   

Capital adequacy standsrobust; RoA impressive at 1.4%

ICICIBank’s CAR and Tier-1 ratio stood at 20% and 13.4% respectively. At the currentpace of credit growth, the bank seems well-capitalized for the longer term. RoAcontinues to impress at 1.4% while RoE remains suppressed near 10% due torobust capital adequacy. On yoy basis, RoA has structurally improved by 25bps.We expect RoA to remain near 1.4% in the medium term aided by stronger NIM andmodest loan-loss provisioning (on the back of sanguine asset quality). RoE onthe other hand is likely to improve by 250bps over the next two years driven byhigher financial leverage.                

Consistent strongperformance calls for a valuation re-rating; upgrade to BUY

ICICI Bank’s financialperformance over the past few quarters has been consistently strong reflectedin brisk (also better quality) loan growth, resilient NIMs, stable assetquality and improved RoA. We believe that some moderation in growth in thecurrent challenging credit scenario is prudent and would support profitabilityin the longer term. We upgrade our recommendation on the bank to BUY withstrong expectation of valuation re-rating in the medium-term. Our 9-monthtarget for the stock is Rs1,250 comprising Rs1,025 (2x FY13E BV) for thestand-alone bank and Rs225 for subsidiaries.

Financial summary

Source: Company, IndiaInfoline Research