ICICI Bank - Diwali Picks 2012 - IIFL

Impressive NIM performance to continue; FY12-14 NII CAGR at 23%

ICICI Bank has witnessed a material improvement in NIM over the past one year driven by cyclical factors. Margin improved despite the headwinds of decline in retail loans contribution, increase in the share of international book and decline in average CASA ratio. Key improvement drivers were strong asset re-pricing and a steep correction in wholesale funding rates (in the more recent quarters). With retail term deposits rates having started to decline, we believe that CASA ratio is near cyclical bottom and would improve in the medium term. The wholesale rates are expected to remain benign driven by comfortable system liquidity, which in turn would be supported by central bank easing and weak credit demand. Loan mix of ICICI Bank would also move favourably with international book remaining flattish and domestic retail loan growth improving. We therefore expect bank's blended NIM to remain above 3% in ensuing quarters underpinning a strong NII CAGR of 23% (v/s loan CAGR of 17%) over FY12-14.

Resilient asset quality; credit cost guidance retained at 75bps

ICICI Bank's absolute gross NPL has been flat over the past two years while substantially declining as a percentage from 5% to 3.5%. Bank's retail gross NPL declined by 23% in aforementioned time aided by low slippages and significant upgrades/recoveries. Overall also, fresh delinquencies have been in the manageable range of Rs7-9bn (slippage ratio of 1.3-1.5%) over the past few quarters (excluding the chunky Deccan Chronicle slippage of ~Rs5bn in Q2 FY13). Except for GTL and 3i infotech, ICICI Bank has not seen significant restructuring and the outstanding restructured assets stand at marginal 1.6% of advances. The pipeline is also non-perturbing with the bank having a negligible share in CDR referrals. ICICI Bank has been providing substantially against fresh NPLs maintaining PCR at 78-80% and net NPLs at 0.6-0.8%. Despite increasing anxiety around potential creation of stress assets in the system, the bank has maintained full-year credit cost guidance at 75bps (73bps in H1 FY13; 68bps in FY12), implying resilient asset quality outlook.

Core RoA to sustain above 1.5%; capitalization is robust

ICICI Bank's core RoA (excluding subsidiary dividends) has seen structural improvement of 15-20bps over the past few quarters aided by handsome margin improvement and stable asset quality. Notwithstanding muted fee income growth, we expect core RoA of the bank to remain above 1.5% in FY13 and FY14 supported by a strong NII performance. With Tier-1 capital at 12.8%, ICICI Bank is one of the well-capitalized banks in the industry.

Re-rating to continue; Top pick in Banking

Over the past 3/6 months, ICICI Bank has marginally outperformed peers and the Bankex aided by consistent earnings beat. Adjusting for the value of subsidiaries, the bank trades at 1.4x FY14 P/adj.BV, which is attractive for a bank delivering RoA of 1.5%+. More so, valuation discount of more than 50% to HDFC Bank is enticing in an improving market sentiment. We expect a continuous valuation re-rating to drive a significant stock outperformance over the next 9-12 months.

Source : Equity Bulls

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