ICICI Bank - Play for all seasons - Centrum

ICICI Bank is well placed to navigate through the tough operating environment in the near term given the strong hold on asset quality and NIMs. Importantly, our stress case analysis indicates a potential downside of ~10% to our stress case value of Rs900 against which the upside potential is significant (~29%) to our fair value estimate of Rs1350. At the current market price, the core banking business trades at 1.3x FY14E ABV which appears quite attractive in the light of improving return ratios and contained asset quality matrix. We suggest investors BUY into the current weakness (macro + cobrapost) in the stock led by a very favorable risk-reward equation.

- Asset quality matrix in strong grip: ICICI Bank has displayed a strong grip over its asset quality matrix since FY11, thanks to the transformation of business model during the consolidation phase. GNPA continues to move lower while PCR remains strong at ~78% and restructured assets largely stable at 1.5% of loans – all culminating in a contained provisioning cost of ~70bps (avg for last 4 qtrs). Backed by a heavy retail loan book and prudently built corporate loan book, asset quality stress related negative surprises are unlikely. Our estimates imply further improvement in GNPA position over FY14 and FY15.

- NIM to withstand pressure: Charting a different trend, ICICI Bank has been able to maintain steady progress in NIMs while the banking sector has been witnessing pressure. Despite the drop in international NIMs (from 1.5% to 1.2% in the last 2 qtrs), overall NIM has remained stable led by gains in domestic NIMs. NIM outlook remains healthy led by anticipated further catch up in international margins (from 1.2% to 1.5%) in the near term and better loan mix over the medium term (higher share of domestic loans).

- Strong capital position: Capital position continues to remain strong (Tier I at 13.2%). Recently, the UK regulator allowed redemption of $100m of capital – responding to ICICI Bank's long standing request. We believe that this is a positive step and will increase RoEs for ICICI over time as more capital gets repatriated.

- Stress case analysis: Under our stress case analysis, we have assumed continued weak economic growth (4.5-5.5% range) - implying gradual stress in retail book as well which in turn can reverse the improving trend in asset quality for ICICI Bank and bring down RoE (adjusted for investments in subs) by 150bps to 14.7% in FY14. In the light of this, the valuation multiple can contract to 1.1x for the core banking business. The stress core banking value of Rs715 along with Rs180/share for subsidiaries leads to our stress case value of Rs900. Based on the current market price, the upside potential of 29% (to fair value of Rs1350) far outweighs downside risk of 13% (to stress case value of Rs900).

- Play on safety as well as delta: Given its strong grip over asset quality matrix and lower likelihood of negative surprises along with healthy NIM outlook, ICICI Bank offers safety in current operating environment. At the same time, given its sizable exposure to large corporates, it also offers a formidable play on macro uptick. Collectively, improving asset trends, sustained NIMs and contained credit costs imply continuity in return ratio expansion which in turn should pave the way for expansion in valuation. At current valuations (1.3x FY14E for core bank), the risk-reward equation appears to be favorable for long term investors.

Source : Equity Bulls

Keywords