Monday, July 20, 2009


The price has to be right

We retain our contrarian Underperform on ICICI, as we do not see any significant leverage to higher economic growth for this bank in particular.

Loan growth will remain stunted. Near-term loan growth (stand-alone) is likely to stay constrained, not least because the international book is expected to contract at ~10% pa for at least two years. The domestic book should grow, but the compulsion to get the CASA* ratio up to the 30s is expected to prevent run-away growth. We see little upside to our loan growth forecasts, even if economic growth accelerates. (*Current accounts and savings accounts).

Margin improvement gradual. The expected shrinkage of the international book should help margins, as should the increased focus on CASA deposits. This is likely to be offset by the run-off in the unsecured book, which is being replaced by low-yield corporate and home loans. The benefit of a lower risk book is likely to flow through in sharply improved credit costs, but only from FY3/11E.

Asset quality – not a lot of relief. There is no significant relief in loan quality. The retail book continues to be under stress, with the unsecured book remaining the primary source. Wholesale loans remains under pressure, though the number of stressed accounts is not growing and that is a source of some relief. We retain our view that the Rs1tr non-retail book will see
cumulative losses of Rs20bn over FY3/10-11.

Earnings and target price revision
We have reduced our FY10E and FY11E EPS forecasts by 6.4% and 2.2%, respectively. We have introduced FY12E earnings. Our TP increases to Rs517 from Rs436 while we retain our Underperform.

Price catalyst
12-month price target: Rs517.00 based on a sum-of-parts methodology.

Catalyst: Continued fees and asset quality stress in 1H FY3/10E.

Action and recommendation
It is not in the price, yet. ICICI has corrected by 6.5% since Monday. Its P/BV of 1.2x FY10E (ex-subsidiaries), however, still appears high in the face of weak ROEs. Management’s medium-term goal of reaching c. 15% ROE is unlikely to be met even by FY3/12E. This is reflected in the stock’s high PER. At 13.7x on FY3/11E, this is a 21% premium to the Sensex multiple, with earnings CAGR at a mere 14% over FY3/09–12E.

Long-term value, but only at the right price. ICICI’s worst days are definitely over, and the management is walking the talk on consolidation. The improvement in core profitability, however, will be a slow process and we would baulk at paying over the odds for the stock. Retain Underperform.

To see full report: ICICI BANK