ICICI Bank - Retail uptick to drive re-rating - upgrade to BUY - Religare

We upgrade ICICIBC from HOLD to BUY and raise our TP from Rs 1,115 to Rs 1,450. ICICIBC is among the better placed banks with a meaningful expansion in footprint over the last 5-6 years coupled with high tier-I capital. We expect retail loans to grow faster than corporate loans driven by higher branch productivity and a pick-up in GDP growth, supporting 16% earnings CAGR through FY16. Corporate asset quality pressures will continue but we still expect ROE to expand to 15%+ by FY16, the highest since FY05, driving a re-rating.

- Expect sharp uptick in retail credit to drive loan growth: ICICIBC's retail loans have grown at a slower pace at ~3% CAGR in the last five years; we expect strong growth in this segment driven by an uptick in GDP growth coupled with productivity gains. This should aid NIMs and asset quality apart from providing a fillip to fee income. Historically, ICICIBC has reported higher ROE when retail loans have grown at a faster clip.

- Strong NIM expansion in FY14 - sustainable in our view: ICICIBC's reported NIM has increased 20bps in FY14E to 3.3%, which is sustainable on the back of a strong liabilities franchise. Higher growth in domestic loans (as opposed to international loans) will lend further support to margins. We factor in a 15bps uptick in NIMs through FY16.

- Tight leash on operating costs allows for higher credit costs: A tight leash on operating costs has helped bring cost/assets down to 1.7%, from a peak of 2.4%. We expect cost ratios to remain at current levels which will allow for higher provisioning costs in a tough corporate asset quality environment. Restructuring is likely to remain high and we incorporate higher credit costs at 80bps through FY16.

- Robust capitalisation levels a positive; upgrade to BUY: High capitalisation (CET at 11.5%) will aid growth without the need for capital raising till FY17-FY18. With ROE likely to rise 140bps to 15.2% though FY16 (the highest since FY05), we expect a re-rating and upgrade the stock to BUY with a new SOTP-based TP of Rs 1,450/sh.

Source : Equity Bulls

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