ICICI Bank - Small, yet critical step in capital reallocation - Ambit

Development: ICICI Bank has received capital repatriation from ICICI Bank UK Plc (the bank's UK banking subsidiary) in the form of equity capital to the tune of $50mn and preference capital redemption to the tune of $50mn.

Where do we go from here? Since the onset of the financial crisis, ICICI Bank's overseas banking subsidiaries viz, ICICI Bank UK Plc, ICICI Bank Canada and ICICI Bank Eurasia have been burdened by excessive capitalization (as reflected in the very high capital adequacy) that has resulted in sub-optimal single-digit RoEs. ICICI Bank, in its efforts to enhance the RoEs from these businesses, has been actively pursuing the capital repatriation / rationalization route (the other two routes being organic growth and higher dividend payouts) for the last couple of years now. However, given the regulatory norms around capitalization of banks, this has been a relatively slow-moving development. Despite the capital repatriation to the extent of $100mn, we believe ICICI Bank UK Plc remains comfortably capitalized (total capital adequacy is likely to settle at a very healthy 23-25% as against the December 2012 level of 31%). We expect this equity to be put to use in organically growing the bank's domestic book. In as much as this allows ICICI Bank to reallocate regulatory capital from a single-digit ROEgenerating business to a relatively higher ROE-generating business, this is a meaningful move. Whilst we acknowledge the lack of any need for regulatory uniformity on these parameters, we believe this development lends the bank greater maneuverability with the Canadian regulators as ICICI Bank pursues a similar objective with its Canadian subsidiary.

We remain BUYers with a valuation of Rs1,290, implying a 17% upside from current levels. The stock quotes at 1.7x our FY14E standalone ABVPS of Rs613 (expected standalone RoEs of 13.3% and 13.9% during FY13E and FY14E). Our sum-of-the-parts valuation of Rs1,295 (revised upwards from Rs1,250) ascribes a valuation of Rs854 for the standalone bank (implied valuation multiple of 1.4x for an EPS CAGR of 20% over FY12-FY15E) using the excess return approach.

Source : Equity Bulls

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