>ICICI Bank (Morgan Stanley)

We are still not Buyers

While ICICI appears to be trading at attractive multiple (0.8x book), we will stay away. We expect ROE around 5% for F2010 and F2011, as revenues come off and credit costs rise. Given cost of equity of 12-14% in India, fair value (under Gordon growth) comes to 0.4-0.6x book. Plus, we see significant potential pressure on asset quality from the international asset book, adding to problems already existing in the consumer book. Until economic growth rebounds, ICICI’s fundamentals are uncertain.

International assets make up 25% of balance sheet, a significant source of concern The bank increased this book from a small base to US$22bn in about three years, implying a significantly unseasoned book. Moreover, many Indian corporates that went abroad to acquire or borrow are facing problems. We now build in impairment of about 10% on these loans with severity of 50%, suggesting a cumulative loss of about 5%.

Current impairment ratio is about 8%. We expect this to go into double digits in F2010. We make relatively conservative assumptions on severity across asset classes. However, we still expect further provisioning of Rs120bn over the cycle. We build in a further Rs80bn of provisioning for F2010 and F2011 combined, but it could be much higher.

Our new target price on the stock is Rs330. Our bear case value is Rs175 and our bull case is Rs600. But, to achieve the bear or bull case, either asset quality has to deteriorate sharply (bear) or the economy and markets have to improve significantly (bull). Neither of these is likely to happen quickly. Until then, the stock is likely to trade in a range of Rs225-440. Should it move meaningfully above or below this range, we would consider it a trading opportunity.

To see full report: ICICI BANK