>ICICI BANK (IDFC SSKI)

At ICICI Bank, aggression of the past has changed color from loan growth, to profitability and risk control. The management has once again meticulously, and consistently, delivered on its recalibrated business plan. The consolidation phase is over and numbers are all there. With credit costs easing, CASA expanding and expenses curtailed, RoA has risen by 30bp to 1.2%. We believe the bank is now all set to execute the next phase of its strategy to deliver high profitability while accelerating balance sheet growth. Over FY10-12, we expect 30% CAGR in the bank’s earnings driven by steeply declining credit costs, expanding margins and strong loan growth. We see a 430bp rise in core business RoE to ~15% over FY10-12. This, we believe, would drive a structural re-rating of the stock from ~1x currently to 2-2.5x core book. Assigning a value of Rs292/ share to non-banking strategic investments and valuing core business at 2.25x FY12E book, we raise our price target on the stock to Rs1,450.

Profitable growth assumes centre-stage: Remaining true to its DNA, ICICI Bank has successfully executed a changed strategy with profitability and risk control at the core. The consolidation has rendered a stronger liability base with CASA deposits rising to 40% as of December 2009, opex to assets down to 1.6% from 2.2% in FY08 and provisions showing signs of peaking out. Importantly, RoA has significantly expanded from 0.9% in FY09 to 1.2% in YTDFY10.

Banking RoE to expand to 15% by FY12E…: Deriving strength from a fortified liability franchise, the bank now looks to rapidly grow corporate and secured retail loans. We estimate the bank’s credit costs to ease from 1.1% of assets in FY10 to 0.7% by FY12 and margins to expand by 20bp. This would drive a 30% CAGR in earnings over the period. Though overall RoE would remain subdued at ~12% due to strategic investments, core banking RoE is expected to rise to ~15% by FY12.

…and drive a re-rating in core business: With high growth potential, ICICI Bank offers the best riskreward in the financials space from a medium-term perspective. Return ratios on core business are catching up with peers, and the stock is due for a structural re-rating. Reiterate Outperformer with an 18- month price target of Rs1,450 (core business valued at 2.25x FY12E book).

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