>ICICI BANK: Strong Performance Prompts Downgrade to EW (MORGAN STANLEY)

ICICI Bank has been a strong outperformer recently driven by the expectation of lower credit costs and a pickup in loan growth. We agree with the potential decline in credit costs – this was the reason for our upgrade in January. We are building in 120 bps credit cost in F2011 and 90 bps in F2012 (from 210 bps in F2010). However, to outperform further the stock will have to deliver revenue growth – and that is likely to be tepid, in our view.

NII growth likely to be in low single digits in F2011 – This compares with 25-30% for other Indian banks under our coverage. We expect 12% loan growth in F2011 (dragged by continued contraction in international and unsecured consumer loans). NIM’s for the year will be flat, in our view. We believe NII growth will come off in F1Q11 driven by a change in the savings bank interest rate and the CRR hike – it will likely spend the rest of F2011 regaining the lost NIM in F1Q2010, implying flat NIMs for F2011.

On costs, we believe that as the bank starts growing again – costs will start increasing. We expect costs to grow faster than core revenue in F2011 – implying that core pre provision earnings growth will only be 8% in F2011 – significantly lagging peers.

Weak core profit growth outlook + performance causes us to downgrade – We believe that the strong performance coupled with relative weakness in revenue progression will likely cause out-performance to stall. We believe that management is delivering on the key variables very well, but that the stock is now pricing in near term growth, which is unlikely. We would turn
bullish again if the stock comes off or growth is stronger than our expectations.

To read the full report: ICICI BANK