>ICICI BANK (EDELWEISS)

As per media reports (ICICI Bank’s capital falls on new a/c rules, ET May 12, 2010), the new RBI rules related to securitisation and treatment of special reserves u/s 36(1) (viii) impacted ICICI Bank’s Tier I, which dipped by INR 11.3 bn Y-o-Y to INR 411 bn in FY10 end. If the change had not been effected, the bank’s Tier I would have been higher by INR 32 bn. The INR 32 bn impact can be explained as follows:

• As per the new guidelines, where banks have provided their own guarantees (as credit enhancement) they will have to be deducted from capital (50% each from Tier I and II) against the earlier practice of adding to risk weighted assets (RWAs) of the bank. ICICI Bank took INR 21 bn hit on its Tier I on account of changes in rules related to securitisation.

• Banks could utilise the entire amount of special reserves u/s 36(1)(viii) created by dipping into pre-tax profit as Tier I. However, as per the new rules, the amount of special reserves netted off by notional tax alone can be used as Tier I. This resulted in deduction of INR 9 bn (equivalent to notional tax payable on special reserves) from ICICI Bank’s Tier I.
The decline in Tier I capital is overshadowed currently due to decline in risk weighted assets (a function of reduction of total assets); hence, the ratio has increased from 11.8% in FY09 to 14.4% in FY10. With a 14.4% Tier I ratio, the bank is adequately capitalised for growth for the next couple of years atleast. In the recent past, the bank has not carried out any securitisation transaction. According to the management, the outstanding exposure has infact declined over the previous year.

The entire exposure is expected to rundown over the next two years. Hence, as ICICI Bank embarks on the growth trajectory, release of capital from the rundown of the securitisation exposure will be available for growth.

■ Outlook and valuations: Re-rating in progress; maintain ‘BUY’
With all the 4Cs of strategy in place, we expect ICICI Bank to return to the growth phase with a more robust business model. On the back of improving core performance and lower credit cost, we expect ~28% CAGR in profits over FY10- 12 and the core ROE to improve to 15% by FY12. Our SOTP fair value for the stock stands at INR 1,143/share (subsidiary valuation of INR 243/share). The stock is currently trading at 1.8xFY12 (adj. book), and we maintain ‘BUY/
‘Sector Outperformer’ on it.

To read the full report: ICICI BANK