Tuesday, December 29, 2009


Awaiting growth, for now. With key issues of liability management, asset quality, unsecured loans and international banking being addressed to a great extent, the management is awaiting loan growth, resulting in better leverage and RoEs. We also believe that faster growth, funded by core deposits, would be crucial for improving RoEs, resulting in higher valuations for the bank. However, RoE in the near term is likely to be driven by lower provisions and lower costs. Retain ADD.

Retain positive view, but valuations do not provide big upsides
We are increasing our TP for ICICI Bank to Rs880 from Rs850 earlier, mainly to factor is somewhat higher valuations for its insurance business. We value ICICI Prudential Life at Rs230 bn (EV of Rs87 bn + appraisal value of Rs143 bn on factoring 19X NBV FY2011E). The per share value of ICICI Prudential Life works out to be Rs140 per share (for 74% stake and 10% holding discount) from Rs115 earlier. The additional capital requirement for ICICI Prudential is likely to be negligible on account of somewhat slower growth in the current fiscal and seemingly higher cost control. While we retain our positive view for ICICI Bank, upsides might be limited (after an already 8% up-move over last 3 trading sessions)

Image makeover – learning from its mistakes
In a recent meeting, the management highlighted its initiatives to change the general perception
about the bank. Some of these aspects are very important and quite commendable as well, in ourview:

(1) The management is trying to project a very soft image of itself across all customers and
different from its earlier ‘know all’ approach.

(2) The bank is trying to build personal relations with its customers and has been increasing its
branch banking focus, compared to its earlier strategy of pushing customers towards ATMs and
internet, which never allowed any relationship to be built between the customer and the bank.

(3) Most of the loan products would be done by the bank and the use of DSA has been reduced to
bare minimum – should ensure better loan writing and better service.

(4) Media interactions are being handled only at the highest level and dissemination of information taken very seriously – a key issue which also precipitated the crisis last year.

Awaiting loan growth; strategy focused on secured credit
The management reiterated its focus on secured retail and domestic corporate loans — mainly mortgages, auto and project financing. Mortgage disbursements for ICICI Bank have increased to about Rs6 bn per month, as compared to Rs1-2 bn per month over the previous 2-3 quarters. ICICI Bank seems to be back in the auto loans business and intends to grow the portfolio at a faster pace from now on. Further, the traditional business of infrastructure finance is likely to be a big focus area and likely to grow at a fast pace, even as most other segments slow down or even decline.

Unsecured loans unlikely to be a focus area in the near term
We believe that the bank is willing to lose its market dominance in the personal loan and credit cards segment. With these being scale businesses and the bank might not be able to run profitable businesses on a smaller scale, the bank might even look at reducing the book further. The focus is only on its own customers and current volumes in both these businesses are negligible.

International book also likely to shrink
The current bond issuance of $750 mn was placed at a fine rate of 2.93 bps over LIBOR. Also, the spreads have reduced somewhat on its other papers. However, the current spreads are still high and the intent is to slowly scale back its international book. While concerns on asset quality and ALM mismatch have reduced, the overseas operations still don’t seem to be profitable with margins at just 0.5%. International book accounts for 27% of total parent loan book and a declining trend out here is likely to curtail the overall loan growth for the bank; however, it would be positive for margins.

Liability focus working well
We believe that one of the key challenges and a crucial business trend for ICICI Bank would be its ability to grow its CASA deposit franchisee. Post the crisis in 3QFY09, the bank has worked well to improve its core deposits. The strategy of focusing on low-cost deposits over the past few quarters appears to be paying off— savings deposits are averaging about Rs 12 bn every month. However, growth in current deposits (similar to experience of other industry participants) has been sluggish. Significant addition in bank branches can help the company improve its CASA deposits in the future. We model CASA deposit growth of 21% yoy in FY2010E (CASA proportion at 33% as of March 2010) and 21% in FY2011E (CASA proportion at 37% as of March 2011).

Margins to improve on back of deposit re-pricing
A clear focus on correcting its liability profile, steep yield curve currently (wholesale deposit rates are very reasonable) and slower loan growth augur well for margins of ICICI Bank. However, its strategy of not growing its high yielding personal loans and credit cards coupled with high competition in mortgages and project finance will restrict margin growth for the bank. We assume margins of 2.7% (increase of 35 bps) in FY2010E and 2.8% (increase of 8 bps) in FY2011E.

Asset quality under control; should see better trends
We believe that the incremental addition to NPLs (especially the unsecured NPLs) has slowed down in recent months and other segments are also witnessing positive trends with incremental restructuring being low. Overall asset quality trends are behaving well. While we are still modeling delinquencies at around 2% for FY2010E and 1.7% in FY2011E, the trend could be better and could result in upsides. The net delinquencies (net of recoveries) are expected to fall from 1.8% in FY2008 to 0.7% in FY2011E. Hence, credit provision requirement for ICICI Bank is likely to fall from 1.7% of average loans in FY2009 to 1.2% in FY2011E and 1.0% in FY2012E – the biggest driver to profitability.

To read the full report: ICICI BANK