ICICI BANK INR 233. Dismal asset quality performance. Target Price (INR): 314. India Equity Institutional Research BFSI.

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1 India Equity Institutional Research BFSI RESULT UPDATE ICICI BANK INR 233 Dismal asset quality performance BUY Q3FY15 earnings for ICICI Bank came as a huge disappointment with bank reporting highest NPAs in past five years (jumped 33% q/q, 62% y/y), threefold spike in provisioning and tepid profitability. Other income traction boosted by Pru Life stake sale (one-off gains) and contained operating costs stood as savings grace. Steel sector issues and impact of RBI s fresh guidelines signal more pain for ICICI Bank in the forthcoming quarters. Moreover, lack of clarity on stressed assets ensure weakness in ICICI Bank stock ahead. Core metrics remain stable; profitability tepid: NII stood at INR 54.5 bn, up 13.3% Y-o-Y, 3.8% Q-o-Q, on the back of stable NIMs at 3.5%, healthy loan growth (15.8% y/y) and robust CASA mobilization. Moderation in cost of funds and strong CASA base supported the stability in NIMs. The loan growth for the quarter was primarily driven by the healthy 24% Y-o-Y growth in retail loans; retail portfolio stood 44% of the total loans. Home loans, vehicle loans and unsecured loans traction boosted the retail loan book growth during the quarter. Overall domestic loan base grew 20.4% Y-o-Y. Bank continues to maintain rich liability franchise characterized by high CASA ratio at 45.2%, CASA deposits grew 18% y/y and average CASA ratio stood steady at 40.7%. While insurance stake sale stood as savings grace, elevated provisions dragged the profitability of the bank PAT reporting mere 4.5% Y-o-Y, flattish Q-o-Q at INR 30.2 bn; below our estimates. Target Price (INR): 314 Potential Upside: 34.6% Previous TP (INR): 345 Market Data Shares outs (Mn) 5812 EquityCap (INR Mn) Mkt Cap (INR Mn) Wk H/L (INR) 393/217 Volume Avg (3m K) Face Value (INR) 2 Bloomberg Code ICICIBC IN Market Info: SENSEX NIFTY 7425 Price Performance Cost containment and insurance stake sale proved savings grace: While costincome ratio improved to 32% while fee income stood tepid reporting 7.2% Y-o-Y growth. Lack of meaningful traction in corporate fees marred the core fee income performance; that said, the overall non-interest income stood robust. It reported 36.4% Y-o-Y growth, 40.2% Q-o-Q primarily led by profit on sale of Pru Life stake sale which largely aided the modest profitability growth during the quarter. Asset quality worsens; gross NPAs highest in past 5-years: The big disappointment came from asset quality with absolute gross NPAs surging 60%+ Y-o- Y/33%+ Q-o-Q and as high as 107%+ Y-o-Y/46%+ Q-o-Q increase in net NPAs; higher than anticipated. Consequently, the Gross NPAs ratio declined to 4.7% (3.4% -Q3FY15; 3.8%-Q2FY16); net NPAs ratio at 2.3% deteriorated from 1.3% in Q3FY15; the worst since past five years. While slippages stood as high as INR 65.4 bn; INR 13.5 bn pertaining to existing restructured loans. Precisely, >60% of the incremental slippages during the quarter have primarily emerged on account of RBI s fresh guidelines on asset quality review. Besides, the credit costs have dramatically increased to 269 bps. One large steel account and RBI s contention to recognize and provide stressed assets led to the substantial deterioration in asset quality as cited by the Management. Bank s exposure to the beleaguered steel sector stood at 4.5% of the loan book during the quarter. The restructured loans stood at bn during the quarter, SDR loans amounted to INR 16 bn and INR 7 bn has been referred to the 5:25 refinancing scheme; all which tells us that the asset formation stands elevated for ICICI Bank. While ICICI bank is yet to recognize the bad assets fully in-line with RBI guidelines and given the lurking leveraged corporate group exposures only indicate that the asset quality pressures are here to stay for the bank. Moreover, given the anticipated slippages (INR 50 to 60 bn in Q4FY16) and credit costs are to be higher for the forthcoming quarter, we tweak our NPA estimates higher and estimate gross NPAs at 4.25% for FY16E and % over FY17-18E. Valuation & Recommendation: It seems a bumpy ride for ICICI Bank ahead especially in the light of the new RBI directive and the bank s meaningful exposure to the leveraged corporate and troubled sectors of the economy. While no complaints on loan book growth that was primarily driven by retail loan traction so also robust noninterest income that proved as the sole savings grace for the bank during the quarter, the slippages and credit costs are expected to stand higher for the forthcoming quarter. That calls for imminent earnings pressure ahead for ICICI Bank. Share Holding pattern (%) Particulars Dec15 Sep15 Jun15 Promoters FIIs DIIs Others Total Source: BSE Shweta Daptardar shweta.daptardar@krchoksey.com Ext KRChoksey Research is also available on Bloomberg KRCS<GO>, ThomsonReuters, Factset and Capital IQ January 29, 2016

2 We reckon while near term pressures should sustain both for state-owned and private banks particularly in light of RBI directive, we would prefer to cherry-pick banks with quality franchise and robust capital efficiency which should prove resilient in tough times. Therefore, strong operating metrics supported by quality franchise and capital sufficiency and lower valuations prompt us to maintain BUY on ICICI Bank. While we introduce FY18 estimates, we cut our target price to INR 314 (earlier INR 345) primarily to incorporate higher credit costs, elevated NPAs and lower earnings. At SOTP fair value of INR 314, we value the core bank at 1.9x P/ABV FY17E and 1.6x P/ABV FY18E and subsidiaries value at Rs 54 per share. At CMP, stock trades at 1.4x core P/ABV FY17E and 1.2x P/ABV FY18E. Key Financials INR in mn FY14 FY15 FY16E FY17E FY18E Net Interest Income 164, , , , ,269 Pre-provision profits 165, , , , ,167 Net Profit 98, , , , ,940 EPS ( ) BVPS ( ) ABVPS ( ) P/E (x) P/ABV (x) Equity Investment in Subsidiaries (INR bn) Q3FY16 Q3FY15 ICICI Life ICICI Bank Canada ICICI bank UK ICICI Lombard General Insurance ICICI Home Finance ICICI Bank Eurasia LLC ICICI Securities Ltd ICICI Securities PD ICICI AMC ICICI Venture Others Key Concall Highlights: Healthy NII growth & other income growth. Substantial high rise in provisons and NPAs PAT at INR 3,018 cr vs INR 2,889 cr, up 4.5% YoY; NII at INR 5,453 cr vs INR 4,812 cr, up13.3%. Provisions at INR 2,844 cr vs INR 980 cr YoY (vs INR 942 cr QoQ). Standalone PAT includes INR1200cr for insurance sale and INR 700 cr of tax write back, Tax rate 19. Net restructured loans at INR 11,294 cr vs INR cr QOQ. Advances at 4.35 lk cr, up 16% yoy; Domestic advances up 20% YoY Total deposits at 4.07 lk cr, up 15% yoy. CASA deposit up 18% YoY; CASA ratio at 45.2%. Absolute gross NPAs surging 60%+ Y-o-Y and as high as 107%+ increase Qo-Q; higher than anticipated. Consequently, the Gross NPAs ratio declined to 4.7% (3.4% -Q3FY15; 3.8%-Q2FY16); net NPAs ratio at 2.3% deteriorated from 1.3% in Q3FY15; the worst since good number of years. Expected to witness similar jump in gross NPAs in Q4; most NPA additions from steel sector in Q3; INR cr Gross NPA, 4.72%. Bank is undertaking the exercise over the timeframe stipulated by RBI. Slippages of INR 6544 cr, INR 1355 cr is from existing restructured loans. Large parts of slippages were driven by one steel account. Next quarter expect slippages in the range of INR crs. 60% of incremental slippages due to RBI directive. SDR amounted to INR 16 bn; 5/25 refinance INR 7 bn. As cited by the Management, the weakness in global steel cycle and RBI s contention to recognize and provide stressed assets that led to the substantial deterioration in asset quality. 2 KRChoksey Institutional Research

3 Q3FY16: Result Analysis INR in mn Q3FY16 Q3FY15 Q2FY16 Y-o-Y Q-o-Q Income Statement Interest income 133, , , % 1.9% Interest expense 78,931 76,236 78, % 0.6% Net interest income 54,530 48,117 52, % 3.8% Non-interest income 42,169 30,917 30, % 40.2% Total Net Income 96,698 79,033 82, % 17.1% -- Employee costs 11,404 11,178 12, % -6.0% -- Other operating expenses 19,696 17,485 18, % 4.3% Operating expenses 31,100 28,663 31, % 0.3% Pre-provision profits 65,598 50,370 51, % 27.2% Provisions % 201.9% Profit before tax 37,158 40,573 42, % -11.9% Tax expense 6,976 11,683 11, % -41.2% Net profit 30,181 28,890 30, % -0.4% Balance Sheet summary Net worth 895, , , % 3.5% Deposits 4,073,140 3,553,397 3,846, % 5.9% Borrowings 1,771,606 1,529,947 1,561, % 13.5% Advances 4,347,998 3,753,451 4,096, % 6.1% Key ratios Q3FY16 Q3FY15 Q2FY16 Y-o-Y Q-o-Q Spread Analysis Yield on avg advances 9.7% 10.2% 10.0% Yield on avg investments 6.2% 6.9% 6.5% Yield on avg int. earning assets 8.7% 8.9% 8.9% Cost of funds 5.8% 6.2% 6.0% Net interest margins 3.6% 3.4% 3.6% Reported NIM 0.0% 3.5% 3.5% Other ratios CD ratio 106.7% 105.6% 106.5% CASA ratio 45.2% 44.0% 45.1% GNPA ratio 4.72% 3.4% 3.8% NNPA ratio 2.3% 1.3% 1.6% Provision coverage ratio 53.2% 63.5% 57.4% Cost to income ratio 32.2% 36.3% 37.5% Capital Adequacy ratio Tier I 11.8% 13.0% 12.8% Tier II 4.0% 4.6% 4.1% CAR 15.8% 17.6% 16.9% KRChoksey Institutional Research

4 Financials Income Statement INR in mn FY14 FY15 FY16E FY17E FY18E Interest income 441, , , , ,553 Interest expenses 277, , , , ,284 Net Interest Income 164, , , , ,269 Non-interest income 104, , , , ,002 Operating income 269, , , , ,271 Operating expenses 103, , , , ,104 -Employee cost 42,201 47,499 51,530 61,815 73,958 Pre-provision profits 165, , , , ,167 Provisions 26,264 39,000 62,521 59,088 66,883 Profit before tax 139, , , , ,284 Tax expense 41,577 46,446 46,137 57,754 67,344 Net profit 98, , , , ,940 Balance Sheet INR in mn FY14 FY15 FY16E FY17E FY18E Equity share capital 11,550 11,597 11,597 11,597 11,597 Reserve and Surplus 720, , , ,042 1,090,208 Net worth 732, , , ,639 1,101,805 Deposits 3,319,137 3,615,627 4,200,662 4,985,443 5,983,783 Borrowings 1,547,591 1,724,174 1,924,678 2,175,470 2,473,631 Other liabilities and provisions 347, , , , ,884 Total 5,946,416 6,461,293 7,323,908 8,489,684 9,934,104 Cash in hand and Bal. with RBI 415, , , , ,327 Investments 1,770,218 1,865,800 2,082,078 2,350,197 2,710,849 Advances 3,387,026 3,875,221 4,501,851 5,357,172 6,378,152 Fixed assets 46,781 47,255 51,364 54,719 59,402 Other assets 327, , , , ,373 Total 5,946,416 6,461,293 7,323,908 8,489,684 9,934,104 Dupont Analysis As % of avg assets NII 2.9% 3.1% 3.1% 3.1% 3.1% Fee Income 1.5% 1.5% 1.6% 1.5% 1.5% Treasury Income 0.1% 0.2% 0.2% 0.2% 0.2% Operating Cost 1.8% 1.9% 1.8% 1.8% 1.9% Provisions 0.5% 0.6% 0.9% 0.7% 0.7% Tax 0.7% 0.7% 0.7% 0.7% 0.7% ROAA 1.7% 1.8% 1.7% 1.8% 1.7% ROAE 14.0% 14.5% 14.1% 14.8% 15.4% Business Profile FY14 FY15 FY16E FY17E FY18E Advances 3,387,026 3,875,221 4,501,851 5,357,172 6,378,152 Credit Deposits ratio 102.0% 107.2% 107.2% 107.5% 106.6% Deposits 3,319,137 3,615,627 4,200,662 4,985,443 5,983,783 CASA Deposits 1,423,784 1,643,799 1,913,341 2,240,658 2,662,593 CASA Ratio 42.9% 45.5% 45.5% 44.9% 44.5% 4 KRChoksey Institutional Research

5 Asset Quality Gross NPA 105, , , , ,451 Net NPA 32,980 62,555 80,442 88,090 86,608 Gross NPA as % of Advances 3.0% 3.8% 4.2% 4.1% 3.8% Net NPA as % of Advances 1.0% 1.6% 1.8% 1.6% 1.4% Credit Costs 0.8% 1.0% 1.5% 1.2% 1.1% Spread Analysis Avg Yield On Advances 10.1% 9.9% 9.8% 9.4% 9.0% Avg Yield On Investments 6.6% 6.6% 6.3% 6.2% 6.2% Avg Yield On Int Earning Assets 8.4% 8.4% 8.4% 8.1% 7.9% Avg Cost Of Deposits 5.7% 5.9% 5.7% 5.6% 5.6% Avg Cost of Funds 6.0% 5.9% 5.8% 5.5% 5.3% Spread 2.4% 2.5% 2.6% 2.6% 2.7% NIM 3.1% 3.3% 3.3% 3.2% 3.2% Growth ratios FY14 FY15 FY16E FY17E FY18E Net interest income 18.8% 15.6% 11.6% 14.5% 17.2% Core Fee income 15.5% 10.7% 15.0% 19.0% 16.8% Pre-provision Profits 25.7% 18.8% 15.7% 11.9% 15.5% Net Profits 17.8% 13.9% 7.0% 16.0% 16.0% Advances 16.7% 14.4% 16.2% 19.0% 19.1% Deposits 13.4% 8.9% 16.2% 18.7% 20.0% Total Assets 10.8% 8.7% 13.4% 15.9% 17.0% Per share data INR EPS DPS BVPS ABVPS P/E (x) P/ABV (x) Dividend Yield 2.0% 2.1% 2.3% 2.5% 2.8% 5 KRChoksey Institutional Research

6 ICICI BANK Date Recomn CMP TP (INR) 29-Jan-16 BUY Nov-15 BUY April-15 BUY Apr-15 BUY Feb-15 ACCUMULATE Jan-15 ACCUMULATE Nov-14 ACCUMULATE Oct-14 BUY Aug-14 BUY Jul-14 BUY Apr-14 ACCUMULATE Rating Legend Our Rating Upside BUY More than 15% ACCUMULATE 5% - 15% HOLD 0 5% REDUCE -5% 0 SELL Less than -5% ANALYST CERTIFICATION: I, Shweta Daptardar (B.Com, MBA), research analyst, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. 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