MORNING INSIGHT

April 30, 2012

RESULT UPDATE
Saday Sinha saday.sinha@kotak.com +91 22 6621 6312

ICICI BANK
PRICE: RS.861 TARGET PRICE: RS.1103 RECOMMENDATION: BUY FY13E P/E: 13.0X, P/ABV: 1.6X

Q4FY12 results: Strong quarter with healthy earnings NII came at Rs.31.05 bn (23.7% YoY) beating our as well consensus estimate on back of 17.3% loan growth along with 27 bps improvement in NIM. Net Income also came ahead of expectations (Rs.19.02 bn; 31.0% growth) well supported by strong non-interest income (35.8% YoY).
CASA mix remained stable QoQ at 43.5% (Q4FY12) which is key to the likely improvement in its future NIM. Positive surprise during Q4FY12 came on NIM front which rose 27 bps to 3.0%. Domestic loan book grew 14.3% YoY while international book grew 26.0% YoY (exchange rate movement did play an important role). Corporate book saw strong growth (27.2% YoY) while agriculture segments saw strong traction QoQ (27.8% QoQ). Retail book continues to grow at moderate pace (7.6% YoY; 9.3% QoQ) despite strong growth in its disbursements. Asset quality continued to improve - net NPA declined to 0.62% at the end of Q4FY12 from 0.94% at the end of Q4FY11 and 0.70% at the end of Q3FY12. In absolute terms also, it declined 23.0% YoY and 9.0% QoQ. Restructured book rose slightly during the quarter to Rs.42.6 bn (1.7% of loan book). Management's focus on stable growth with improving structural profitability reinforces our existing positive outlook on the stock. We are modeling earnings to grow 18.3% during FY13E and reiterate BUY on the stock with the unchanged TP of Rs.1103 (SOTP method), where the value of its standalone business comes to Rs.880 (1.6x FY13E ABV) and the value of subsidiaries at Rs.223 (holding company discount: 20% to the fair value of its subsidiaries at Rs.278).
Quarterly Performance
(Rs. mn) Int. on advances Int. on investments Int. on RBI/Other balances Other Interest Total Interest earned Interest expenses Net interest income Other income Net Revenue (NII + Other income) Total operating expense Employee cost Direct marketing agency expenses Other operating exp Operating profit Provisions Provision for Taxes Deferred tax Net profit EPS (Rs.)
Source: Company

Q4FY12 61282 26155 1279 3031 91746 60699 31048 22285 53332 22216 11031 533 10652 31116 4693 6291 1115 19018 16.50

Q4FY11 45351 22093 911 3210 71565 46467 25097 16407 41504 18455 8566 453 9436 23049 3836 5606 -914 14521 12.61

% Change 35.1 18.4 40.5 -5.6 28.2 30.6 23.7 35.8 28.5 20.4 28.8 17.7 12.9 35.0 22.3 12.2 NM 31.0 30.8

Kotak Securities - Private Client Research

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MORNING INSIGHT

April 30, 2012

NII grew 23.7% during Q4FY12, ahead of our expectations; net Income was also strong aided by robust non-interest income. NII came at Rs.31.05 bn (23.7% YoY) beating our as well consensus estimate on back of 17.3% loan growth along with 27 bps improvement in NIM. Net Income also came ahead of expectations (Rs.19.02 bn; 31.0% growth) well supported by strong non-interest income (35.8% YoY).
Domestic loan book grew 14.3% YoY while international book grew 26.0% YoY (exchange rate movement did play an important role). Corporate book saw strong growth (27.2% YoY) while agriculture segments saw strong traction QoQ (27.8% QoQ). Retail book continues to grow at moderate pace (7.6% YoY; 9.3% QoQ) despite strong growth in its disbursements. We believe closing number has been impacted by two factors - 1) Unsecured retail book continued to decline and 2) Prepayment in secured retail book (mortgages)
Trend in loan book
Q1FY11 Advances (bn) Retail including CV Corporate & Project Finance Agriculture International
Source: Company

Q2FY11 1,942.0 781 542 132 487

Q3FY11 2,066.9 790 620 153 504

Q4FY11 2,163.7 837 565 210 552

Q1FY12 2,206.9 827 633 188 558

Q2FY12 2,339.5 819 676 175 669

Q3FY12 2,461.6 824 766 175 697

Q4FY12 2,537.3 901 718 223 695

1,843.8 763 443 166 451

CASA mix remained stable QoQ at 43.5%; we expect NIM to come at 2.9% during FY13 as compared to 2.73% achieved during FY12. The bank has been focusing on improving its funding mix by increasing the share of CASA mix which improved from 28.7% at the end of FY09 to 45.1% at the end of FY11. CASA mix remained stable QoQ at 43.5% during Q4FY12 which is key in our view, to the likely improvement in its future NIM. Even the average CASA mix remained stable QoQ at 39% during Q4FY12.
Trend in Deposit growth
Q2 FY11 Deposits (bn) Saving deposits Current deposits CASA (Low Cost Deposits) Term deposits CASA (%)
Source: Company

Q3 FY11 2,177.5 645.8 316.2 962.0 1,215.5 44.2

Q4 FY11 2,256.0 668.7 347.8 1,016.5 1,239.6 45.1

Q1 FY12 2,306.8 668.6 297.8 966.4 1,340.4 41.9

Q2 FY12 2,450.9 701.5 330.0 1,031.5 1,419.5 42.1

Q3 FY12 2,605.9 735.0 400.4 1,135.4 1,470.5 43.6

Q4 FY12 2,555.0 760.5 349.7 1,110.2 1,444.8 43.5

2,230.9 632.5 348.6 981.1 1,249.9 44.0

During Q4FY12, positive surprise came on NIM front which rose 27 bps to 3.0%. We believe its NIM to witness some improvement during FY13 as ~Rs.4.0 bn (annual impact) worth of credit losses on securitized book which are booked under the interest income line would run-off from next year (i.e. FY13 onwards). Even international book is likely to support the NIM at higher levels. We are modeling NIM to come at 2.9% during FY13 as compared to 2.73% achieved during FY12.

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MORNING INSIGHT

April 30, 2012

Asset quality continued to improve; although restructured book spiked during Q4FY12, it was largely in line with management's earlier guidance. Asset quality continued to improve - net NPA declined to 0.62% at the end of Q4FY12 from 0.94% at the end of Q4FY11 and 0.70% at the end of Q3FY12. In absolute terms also, it declined 23.0% YoY and 9.0% QoQ.
Although restructured book spiked during Q4FY12 (116% YoY), it was largely in line with management's earlier guidance. Cumulative restructured book stands at Rs.42.6 bn (1.7% of loan book). Earlier management had indicated that exposure worth ~Rs.13.0 bn has been referred under CDR (names like GTL and 3I Infotech) which could be restructured during Q4FY12. Hence, we are not surprised to see this spike on the restructuring front.

Valuation and Recommendation At the current market price of Rs.861, the stock is trading at 13.0x its FY13E earnings and 1.6x its FY13E ABV. We are modeling earnings to grow 18.3% during FY13E and expect bank to focus on liability franchise (CASA mix) and profitability (RoE is likely to improve further with increase in leverage in next 2-3 years); loan growth target would track the deposit mobilization with CASA share being maintained at 40%+ levels.
Sum of Parts Valuation
Basis Core Banking Business (standalone) Overseas Banking Subsidiaries Life Insurance Business ICICI Securities Asset Management Private Equity Non Life Insurance Total Value of subsidiaries 20% discounted value Total Value
Source: Kotak Securities - Private Client Research

Multiple 1.60 1.50 12 12 5% 10% 12

Year FY13 FY13 FY13 FY13 FY13 FY13 FY13

Value / Share 880 58 158 14 23 21 4 278 223 1,103

ABV ABV NBAP PAT AUM AUM PAT

Rolling 1-year forward P/ABV band

2000 1600 1200 800 400 0 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
Source: Company, Kotak Securities - Private Client Research

CMP 1.5x 3.0x

0.5x 2.0x 3.5x

1.0x 2.5x

Kotak Securities - Private Client Research

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MORNING INSIGHT

April 30, 2012

Rolling 1-year forward P/E band

2400 CMP 20x 5x 25x 10x 30x 15x 35x

1800

1200

600

0 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
Source: Company, Kotak Securities - Private Client Research

We recommend BUY on ICICI Bank with a price target of Rs.1103

Focus on CASA, NIM and asset quality continues; management focus on stable growth with improving structural profitability reinforces our existing positive outlook on the stock. We reiterate BUY on the stock with the unchanged TP of Rs.1103 (SOTP method), where the value of its standalone business comes to Rs.880 (1.6x FY13E ABV) and the value of subsidiaries at Rs.223 (holding company discount: 20% to the fair value of its subsidiaries at Rs.278).
Key data
(Rs bn) Interest income Interest expense Net interest income Growth (%) Other income Gross profit Net profit Growth (%) Gross NPA (%) Net NPA (%) Net interest margin (%) CAR (%) RoE (%) RoA (%) Dividend per share (Rs.) EPS (Rs) Adjusted BVPS (Rs) P/E (x) P/ABV (x)
Source: Kotak Securities - Private Client Research

FY10 257.07 175.93 81.14 -3.0 74.78 97.32 40.27 7.1 5.2 2.1 2.5 19.4 8.0 1.1 12.0 36.1 428.5 23.8 2.0

FY11 259.74 169.57 90.17 11.1 66.48 90.48 51.53 28.0 4.6 1.1 2.7 19.5 9.7 1.3 14.0 45.5 457.4 18.9 1.9

FY12E 335.43 228.09 107.34 19.0 75.03 103.86 64.69 25.6 4.0 0.8 2.7 18.6 11.2 1.5 16.5 56.1 501.1 15.3 1.7

FY13E 384.51 252.39 132.12 23.1 78.21 120.72 76.50 18.3 3.6 0.7 2.9 17.4 12.2 1.6 17.5 66.4 550.1 13.0 1.6

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