ICICI Bank Ltd - Research Report

Private Client Research

Rating

Buy

Sector

Bank - Private

Company

ICICI Bank Ltd

Bank - Private


April 09, 2019

Sensex: 38939.22


CNX Nifty: 11671.95

NSE: ICICIBANK


BSE: 532174

Reco Price
Rs. 391
Price Target (1 Year)
Rs. 470
Upside
20.20%

Date

April 09, 2019

Sensex

38939.22

CNX Nifty

11671.95

Exchange

Code

NSE

ICICIBANK

BSE

532174

Stock Data

CMP (Rs)
397.15
Face value (Rs)
2
52 Week Range (Rs)
409.55 - 256.50
Market cap (Rs Crores)
255858.23
Price To Book Value (x)
2.44
P/E Ratio (x)
74.48
EV/EBIDTA (x)
16.35

One Year indexed Stock Performance

ICICI Bank Ltd Sensex
ICICI Bank Ltd
Return (%)
1m
6m
12m
36m
Absolute
5.59
29.66
41.52
94.21
Sensex
5.09
13.53
15.24
55.62

Shareholders

(in %)
31-Mar
Promoter
00
Public
100.00
Others
00
Total
100

+91 22 6639 3000

research@stockaxis.com

Profile

ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses.

In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI Bank became the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE.

In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. Consequent to the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been integrated in a single entity.

ICICI Bank currently has a network of 4,867 Branches and 14,367 ATMs across India.

Asset quality pain over. New management to drive growth.

Investment Rationale:
Governance issue almost resolved: After the appointment of Girish Chandra Chaturvedi, who replaced Chanda Kochhar as chairman of the bank and the board’s agreement to enquiry on questionable corporate governance practices, we believe that the bank is through the governance issues which led to a significant negative sentiment against the bank. The bank’s consumer franchise and operating metrics remain healthy and we believe that the bank is poised for decent growth going forward.

Asset quality pain is largely over: ICICI Bank’s gross non-performing assets (GNPAs) as a percentage of total advances were at 9.3% at the end of H1 FY19 against 9.9% at the end of FY18. Though the improvement in H1 has not been significant, we believe that the bank has seen peak asset quality stress and slippages to NPAs will be significantly lower than what we have seen in the past.

Particulars Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19
Amount of Gross NPA 38,085 42,552 43,148 44,489 46,039 54,063 53,465 54,489
Amount of Net NPA 20,155 25,451 25,306 24,130 23,810 27,886 24,170 22,086
% of Gross NPAs 7.9% 8.7% 8.8% 8.8% 8.6% 9.9% 9.7% 9.3%
% of Net NPAs 4.0% 5.4% 5.4% 5.0% 4.6% 5.4% 4.7% 4.1%
Provision Coverage Ratio (PCR) 57.1% 53.6% 41% 59.3% 60.9 60.5% 66.1% 69.4%

Strong Capital base: The bank’s capital adequacy ratio (CAR) - capital to risk weighted assets - stands at 17.84% at the end of H1 FY18, which is significantly higher than the regulatory requirement of 9%. The bank is adequately capitalized for growth in the medium term. Write backs from previously written off loans will also benefit the company shore up its capital base.

Credit growth to be healthy due to the vacuum created in the market by non-bank financing companies (NBFCs): RBIs crackdown on bad loans back in the year 2015 significantly dented the lending capacity of corporate banks and public sector banks leading to the rise of NBFCs, which replaced banks with respect to lending. However, lately, NBFCs have also got into trouble as they borrowed short-term against which long term loans were disbursed, leading to asset-liability mismatches. We believe the growth in NBFC loan book will be moderate from here as they will work towards stabilizing their existing business. Banks will now replaced NBFCs in the lending segment and will see good growth in advances going forward.

Improving balance sheet with higher share of retail in loan book: Due to rise in NPAs in ICICI Bank’s corporate book in the past few years, it focused aggressively on reducing the exposure to corporates and increasing its retail exposure. The share of retail in total portfolio increased from 39% in FY14 to 57.3% in H1 FY19. Asset quality in retail was also better than the bank’s overall asset quality with GNPA of 1.73% and NNPA of 0.74%.

Advances – Break-up:

Advances (Rs. Crore) FY14 FY15 FY16 FY17 FY18 H1FY19
Domestic Book 248,945 293,338 341,275 389,464 447,838 475,436
- Retail 132,093 164,300 202,850 240,456 290,018 311,813
- SME 14,903 17,438 18,718 22,282 25,620 25,294
- Corporate 101,949 111,600 119,708 126,727 132,199 138,329
Overseas Book 89,756 94,163 94,025 74,736 64,562 69,051
Total 338,700 387,500 435,300 464,200 512,400 544,487

Advances - % wise break-up:

ICICI Bank Ltd
ICICI Bank Ltd

NIM improvement will lead to higher ROE and ROA: Lower provisioning and higher credit growth will lead to higher earnings, which, in turn, will lead to better ROE and ROA. The bank will also see a reduction in cost to income ratio as operating leverage will start kicking in as the loan book grows. Cost to income ratio, currently at 38.9% is already amongst industry leading and will improve further going forward.

Other businesses to add significant value: The bank has a number of subsidiaries catering to different financial needs of customers across the country. Few of these subsidiaries are market leaders in their respective areas of operations. Some of its renowned subsidiaries are ICICI Prudential Life Insurance, ICICI Lombard General Insurance, ICICI Prudential Asset Management and ICICI Securities. We believe that the country will witness increased level of financial inclusion going forward which will benefit these businesses directly.

 

Industry

The Indian banking system consists of 27 public sector banks, 21 private sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative banks, in addition to cooperative credit institutions. In FY17-18, total lending increased at a CAGR of 10.94 per cent and total deposits increased at a CAGR of 11.66 per cent. India’s retail credit market is the fourth largest in the emerging countries. It increased to US$ 281 billion on December 2017 from US$ 181 billion on December 2014.

Profit & Loss Statement:- (Standalone)

(Rs Crores)

DESCRIPTION FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Interest Earned 44178.00 49091.00 52739.00 54156.00 54966.00 62936.00 75523.00
Interest Expended 27703.00 30052.00 31515.00 32419.00 31940.00 36731.00 44077.00
Net Interest Income 16476.00 19040.00 21224.00 21737.00 23026.00 26205.00 31446.00
Growth (%) 15.60% 11.50% 2.40% 5.90% 13.80% 20.00%
Other Income 10428.00 12176.00 15323.00 19504.00 17420.00 14981.00 17228.00
Total Income 26903.00 31216.00 36547.00 41242.00 40445.00 41186.00 48674.00
Growth (%) 16.00% 17.10% 12.80% -1.90% 1.80% 18.20%
II. EXPENDITURE
Operating Expenses 10309.00 11496.00 12684.00 14755.00 15704.00 17902.00 20230.00
Pre-provisioning Operating Profit 16595.00 19720.00 23864.00 26487.00 24742.00 23283.00 28444.00
Provisions and Contingencies 2626.00 3900.00 11668.00 15208.00 17307.00 16900.00 9400.00
Profit Before Tax 13968.00 15820.00 12196.00 11279.00 7435.00 6383.00 19044.00
Taxes 4158.00 4645.00 2469.00 1478.00 657.00 1277.00 5713.00
Tax Rate (%) 29.80% 29.40% 20.20% 13.10% 8.80% 20.00% 30.00%
Profit After Tax 9810.00 11175.00 9726.00 9801.00 6777.00 5107.00 13331.00
Growth (%) 13.90% -13.00% 0.80% -30.90% -24.70% 161.10%
Advances 338700.00 387500.00 435300.00 464200.00 512400.00 590000.00 674000.00
Equity 73213.00 80429.00 89736.00 99951.00 105159.00 110266.00 123596.00
Market Cap 143848.00 182787.00 137548.00 161396.00 178955.00 235211.00 235211.00
Price 226.00 287.00 215.00 252.00 278.00 391.00 391.00
BV 116.00 126.00 136.00 151.00 159.00 167.00 187.00
P/BV 2.00 2.30 1.60 1.70 1.80 2.30 2.10
No. of Shares 634.00 637.00 659.00 663.00 661.00 661.00 661.00
Source: Stockaxis Research, Company Data

Valuation

We believe that the worst is behind and the bank is relatively better placed in term of its loan book and stressed asset exposure. We also believe that ICICI Bank will be one of biggest beneficiaries of improvement in credit growth and rising financial savings in the economy. We value ICICI Bank using sum of the parts (SOTP) methodology, valuing the bank at Rs. 330 (1.75x FY20E adjusted book value) and the other businesses of the bank at Rs. 100 per share, arriving at a target price of Rs. 430.