>(ICICI BANK) KOTAK SECURITIES

Valuations stretched despite factoring in better environment; downgrade to REDUCE. We find the ICICI Bank’s stock expensive at 1.9XPBR FY2011E despite factoring in an uptrend in its core business (expansion in spreads and decline in delinquencies). We believe that ICICI Bank’s stated target of 15% RoEs may still be couple of years away. Post the recent up-move of 15% over the last month (7% outperformance), we do not find any upside at current levels; downgrade the stock to REDUCE with a target price of Rs910.

We find valuations expensive in light of subdued RoEs in the medium term
We believe that the current valuations are running ahead, despite assuming much better business performance over next two years. Improvement in margins and reduction in delinquencies will push ICICI Bank’s RoEs to 14.8% in FY2012E from 10.2% in FY2010E, in our view. Any further improvement in RoEs is likely to be a function of a higher-than-expected growth, which we believe will be challenging in light of the highly competitive lending environment.

International business continues to remain a drag on overall profitability
International loans account for about 26% of the total loans of the parent book and ICICI Bank
earns about 50 bps spread on the international business. We do not believe that this is likely to be a high RoE business and even as the proportion of international business reduces, drag on
profitability and returns is likely to continue for ICICI Bank for some time. Thus, even as the
domestic loan growth is likely to be about 20%, a subdued international book is likely to result in
a lower overall growth for ICICI Bank. Its international banking subsidiaries had delivered an RoE of 13% (UK) and 3% (Canada) in FY2009, and we do not expect significant improvement out there.

Growth will pick up; but will still remain sub-industry level
ICICI Bank has done commendable work on costs and is currently working on the lowest
cost/assets amongst its peer groups. However in the process, it has vacated/reduced exposures on markets like personal loans, credit cards, 2-wheelers, etc. This coupled with continued rundown of the international business will make above-industry growth very difficult for ICICI Bank. We believe that the lending markets are fairly competitive and to grow faster than the market, the bank might have to compromise on its pricing, which again is not a great strategy in our view. Thus we do not expect a very fast growth for ICICI Bank—16% CAGR growth for FY2010-FY2012E.

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