>ICICI Bank (GOLDMAN SACHS)

Upgrade to Buy on improving fundamentals; add to Conviction list

Source of opportunity
We upgrade ICICIB to Buy from Neutral and add it to our Asia Pacific Conviction Buy list. We believe 1) reduced stress on funding position from lower wholesale costs domestically and globally, 2) improving visibility on growth returning back to sustainable growth path in 2010E, 3) cost controls sufficiently offsetting headwinds to revenue, 4) continued focus on profitability, and 5) a moderate valuation (0.9X 09E P/B vs historic median of 1.6X) despite the run-up in share price since March 2009 lows, would likely be key drivers of stock price. We believe upside risk could stem from sustained improvement in the bank’s fundamentals.

Catalyst
Successful execution of the bank’s strategy to be evidenced by sequential improvement in its fundamentals, stabilization of macro economic environment mitigating concerns of a severe downturn in asset quality cycle, and stabilization of asset markets leading to improved outlook for the growth of life insurance business would be key catalysts for the stock, in our view. We raise our EPS estimates 7% and 5% for 2009E and 2010E to reflect lower funding costs. We raise our 12-m TP by 29% to Rs530 based on our earnings upgrade as well as improving prospects on long-term profitability.

Valuation
Our 12-m TP of Rs530 (from Rs410) is derived using SOTP methodology. We value the banking business at the mid-point of GS CAMELOT-derived P/B multiples and ex-growth value. We value the strategic investments of ICICIB using multiple methodologies.

Key risks
Risks: a) significant deterioration in the asset quality of wholesale banking segment; b) any additional recap needs for the international subsidiaries leading to BVPS erosion; and c) execution risks in consumer banking.

To see full report: ICICI BANK