Attractive Valuation Strong Buy Sector : Bank Private Target Price : Rs 284 Current Market Price : Rs 230 Market Cap : Rs 1,337 bn 52-week High/Low : Rs 393/216 Daily Avg. Volume : 13.88 mn Shares in issue : 5.81 bn Face Value : Rs 2 Beta : 1.48 Pledged Shares : 0% Year End : March BSE Scrip Code : 532174 NSE Scrip Code : ICICIBANK Bloomberg Code : ICICIBC IN Reuters Code : ICBK.BO Nifty : 7,563 BSE Sensex : 24,871 Analyst : Raj Kumar Jha Price Performance ICICI Bank Bank Nifty Nifty 450 400 350 300 250 200 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Shareholding Pattern 3Q FY16 result update Review of results ICICI Bank s reported highly disappointing 3Q FY16 financial results. Higher provisioning for deteriorating asset quality dented the net profit during the quarter; however, net interest income (NII) was in-line with our expectation. During the quarter, bank reported 13.3% y-o-y growth in NII to Rs 54.53 bn against our estimate of Rs 55.01 bn, aided by healthy growth in advances and robust net interest margin (NIM). Advances grew by 15.8% y-o-y while NIM improved by 7 bps y-o-y to 3.53%. In 3Q FY16, bank reported 4.5% y-o-y growth in net profit to Rs 30.18 bn on account of healthy non-interest income. Higher non-interest income protected the operating results. During the quarter, non-interest income grew by 36.4% y-o-y and 40.2% q-o-q to Rs 42.17 bn on back of Rs 12.43 bn profit on sale of 4.0% shareholding in ICICI Prudential Life Insurance Company. Adjusting the profit of Rs 12.43 bn of ICICI prudential, bank reported 4% y-o-y decline in non-interest income to Rs 29.74 bn. During the quarter, fee income reported 7.2% y-o-y growth to Rs 22.62 bn. During the quarter, bank reported 22.4% y-o-y and 17.1% q-o-q growth in operating income to Rs 96.70 bn while operating profit grew at slightly higher pace. During the quarter, operating profit grew by 30.2% y-o-y and 27.2% q-o-q to Rs 65.60 bn due to lower operating expenses. During the quarter, operating expenses grew by 8.5% y-o-y and remained flat sequentially to Rs 31.10 bn, resulting 411 bps y-o-y and 538 bps q-o-q reductions in cost-to-income ratio to 32.2%. Adjusting the one-time income from asset sale, cost-to-income ratio marginally increased annually but it declined sequentially to 36.91%. Worsening asset quality of bank increased the provisions and contingencies expenses in 3Q FY16. Provision and contingency expenses grew significantly to Rs 28.44 bn, registering 190% y-o-y and 202% q-o-q growth, translating credit cost to 2.62% (annualised). Management indicated that the stress level is going to remain for next quarter; hence we have assumed elevated provisioning for next quarter. Significant deterioration in asset quality During the quarter, bank witnessed a significant deterioration in asset quality. Fresh slippage was Rs 65.44 bn, of this Rs 13.55 bn from restructured assets. During the quarter, slippage rate was 6.02% (annualised). The 2/3rd addition in GNPA was RBI s asset review and similar amount is expected in 4Q FY16 ( considering the stress level in certain loan accounts, RBI s directed to make the provisioning over two quarters Dec 2015 and March 2016). During the quarter, up-gradation & recovery was Rs 5.0 bn, write-off was Rs 6.56 bn and a small amount of Rs 0.38 bn sold to ARC during the quarter. Consequently net accretion to GNPA was Rs 53.5 bn, translating 4.72% of gross advances which grew 95 bps q-o-q. During the quarter, NNPA grew by 63 bps q-oq to 2.28%. During the quarter, bank restructured Rs 5.84 bn loans and taking total restructured loans of the bank to Rs 112.94 bn against 118.68 bn 2Q FY16. During the quarter, bank implemented refinancing under the 5/25 scheme for Rs 4.5 bn and SDR (Strategic Debt Restructuring) for about 16.7 bn. Management guided the SDR and 5/25 in pipeline is expected to be Rs 12.0 bn and 7.0 bn respectively for next quarter. During the quarter, capital adequacy ratio (CAR) of the bank was 16.74% (as per Basle III) and Tier I capital was 12.74% (including 9M FY16 net profit). Page 1
Retail continues to drive growth During the quarter, bank reported 17% y-o-y growth in domestic advances while total loan grew by 15.8% y-o-y to Rs 4,348 bn, primarily driven by retail. In 3Q FY16, retail portfolio registered 24.1% y-o-y growth to Rs 1,904 bn, constituting 43.8% of total advances against 40.9% in 3Q FY15, aided by each and every segment of retail portfolio except commercial business and outperformed by credit card and personal loan. During the quarter, home loan grew by 23.8% y-o-y to Rs 1,046 bn while personal loan grew by 41.8% y-o-y to Rs 91 bn and credit card loan grew by 34% y-o-y to Rs 51 bn. During the quarter, bank reported 14.6% y-o-y growth to Rs 4,073 bn, driven by healthy CASA deposits growth. During the quarter, saving deposit grew by 14.8% to Rs 1,269 bn while current deposit grew by 24.53% y-o-y to Rs 571 bn, consequently CASA ratio of the bank improved by 120 bps y-o-y to 45.2%. Future Outlook Considering the current deterioration in asset quality and similar guidance for next quarter, we have increased the credit cost, resulting massive change in our previous projection. We believe substantial addition in GNPA & NNPA and we also expect some ROA and ROE will moderate for next few quarters. Management has guided that NIM will be under pressure due to SDR, 5/25 scheme and healthy slippage. Management also guided that advances is expected to grow 16-20%, aided by retail growth above 25% and corporate loan growth in range of 10-15%. In deposits front, management guided a stable CASA on an average basis between 38% and 40%. Considering above facts, we have estimate 18% advances and deposits growth over FY15-17E and 13% NII & 9% PAT growth over the same period. We believe aggressive branch expansion and focus on retail business will drive the growth in medium to long term. We have revised our target Price downward, continuing with Strong Buy Considering the pressure on asset quality and net profit, we have revised our target price from Rs 370/share to Rs 284/share, implying Strong Buy. At CMP of 230, stock is available at 1.76x FY16E standalone adjusted book value (ABV) of Rs 130 and 1.59x FY17E standalone ABV of Rs 145. Adjusting the subsidiary companies valuation of Rs 66/share, ICICI bank s stock is available at 1.25x FY16E ABV of Rs 130 and 1.13x FY17E standalone ABV of Rs 145. Our valuation is based on sum-of-the-parts methodology. The valuation of ICICI Bank standalone is Rs 217/share based on 1.50x FY17E standalone ABV of Rs 145 (Earlier we have valued 303 based on 1.80x FY17E ABV of Rs 169/share) and the valuation of subsidiaries is Rs 67/share (after offering 30% discount). Consequently we arrive at target price of Rs 284/share per share, representing ~ 23% upside. At CMP of Rs 230, we continue with Strong Buy. Exhibit 1: 3Q FY16 Result Update (Standalone) INR Mn 3Q FY15 2Q FY16 3Q FY16 Q-o-Q change Y-o-Y change 3Q FY16E Variation from estimates NII 48,117 52,515 54,530 3.8% 13.3% 55,015-0.9% Other Income 30,917 30,074 42,169 40.2% 36.4% 33,157 27.2% Operating income 79,033 82,588 96,698 17.1% 22.4% 88,172 9.7% Operating expenses 28,663 31,004 31,100 0.3% 8.5% 32,183-3.4% Operating profit 50,370 51,584 65,598 27.2% 30.2% 55,989 17.2% provision and contigencies 9,797 9,422 28,441 201.9% 190.3% 10,734 164.9% PBT 40,573 42,163 37,158-11.9% -8.4% 45,255-17.9% Tax 11,683 11,862 6,976-41.2% -40.3% 12,898-45.9% PAT 28,890 30,301 30,181-0.4% 4.5% 32,357-6.7% Adj. EPS (Rs) 4.99 5.22 5.19-0.5% 4.0% 5.57-6.8% GNPA Ratio 3.40% 3.77% 4.72% 95bps 132bps - - NNPA Ratio 1.27% 1.65% 2.28% 63bps 101bps - - NIM 3.46% 3.52% 3.53% 1bps 7bps - - CASA 44.00% 45.10% 45.20% 10bps 120bps - - Cost-to-Income ratio 36.3% 37.5% 32.2% -538bps -411bps 36.5% -434bps PCR (x) 63.50% 57.40% 53.20% -420bps -1,030bps - - ROA 1.9% 1.9% 1.8% -7bps -8bps - - Adjusted Cost-to-income (x) 36.27% 37.54% 36.91% -63bps 64bps 36.50% 41bps Page 2
Change in our estimate Considering the current deterioration in asset quality and slippage, we have changed our projection down by 2.5% and 6.5% in NII and 9.7% and 16.1% for net profit for FY16E and 17E respectively. We expect higher credit cost and net NPA will have the negative impact on the book value, hence adjusted book value declined 11.8% and 14.1% for FY16E and FY17E to Rs 130/share and 145/share respectively. Exhibit 2 : Change in our projection Income Statement (Rs mn) Previous Projection Current Projection Variation from estimates FY16E FY17E FY16E FY17E FY16E FY17E Net interest income 221,187 260,762 215,747 243,786-2.5% -6.5% Other income 141,560 165,584 141,314 165,774-0.2% 0.1% Operating income 362,746 426,346 357,061 409,560-1.6% -3.9% Operating profit 231,251 274,993 229,412 264,166-0.8% -3.9% PBT 186,680 226,290 160,071 189,426-14.3% -16.3% PAT 131,292 159,150 118,613 133,545-9.7% -16.1% EPS (Rs) 22.59 27.38 20 23-9.7% -16.1% Adjusted book value per share (Rs) 147.9 168.8 130 145-11.8% -14.1% Exhibit 3: Financial Summary (Standalone) Income Statement (Rs mn) FY12 FY13 FY14 FY15 FY16E FY17E Net interest income 107,342 138,664 164,756 190,396 215,747 243,786 Other income 75,028 83,457 104,279 121,761 141,314 165,774 Operating income 182,369 222,121 269,034 312,157 357,061 409,560 Operating profit 103,865 131,992 165,946 197,199 229,412 264,166 PBT 88,034 113,967 139,682 158,199 160,071 189,426 PAT 64,653 83,255 98,105 111,754 118,613 133,545 EPS (Rs) 11.22 14.43 16.99 19.24 20.40 22.97 Balance Sheet (Rs mn) Shareholders' equity 604,053 667,064 734,075 804,294 886,308 979,155 Deposits 2,555,000 2,926,136 3,319,137 3,615,627 4,182,714 5,009,962 Borrowings 1,401,649 1,453,415 1,547,591 1,724,174 1,882,221 2,204,383 Cash and bank balance 362,293 414,175 415,296 423,046 439,185 500,996 Investments 1,595,600 1,713,936 1,770,218 1,865,800 1,714,913 1,953,885 Advances 2,537,277 2,902,494 3,387,027 3,875,221 4,529,707 5,435,648 Total assets 4,736,471 5,367,947 5,946,416 6,461,293 7,013,389 8,256,191 Adjusted book value per share (Rs) 101.6 111.8 121.4 129.9 130.5 145.0 Exhibit 4: Ratio Analysis (Standalone) Key Ratios FY12 FY13 FY14 FY15 FY16E FY17E Net interest margin 2.57% 2.91% 3.11% 3.24% 3.36% 3.35% Cost-to-income ratio 43.05% 40.58% 38.32% 36.83% 35.75% 35.50% PAT margin 35.45% 37.48% 36.47% 35.80% 33.22% 32.61% GNPA ratio 3.62% 3.22% 3.03% 3.78% 5.50% 4.90% NNPA ratio 0.73% 0.77% 0.97% 1.29% 2.82% 2.51% RoAA 1.47% 1.65% 1.73% 1.80% 1.76% 1.75% RoAE 11.20% 13.10% 14.00% 14.53% 14.03% 14.32% Note: The values for certain metrics may differ from the reported data due to variations in the methods of computation Page 3
Guide to Khambatta s research approach Valuation methodologies We apply the following absolute/relative valuation methodologies to derive the fair value of the stock as a part of our fundamental research: DCF: The Discounted Cash Flow (DCF) method values an estimated stream of future free cash flows discounted to the present day, using a company s WACC or cost of equity. This method is used to estimate the attractiveness of an investment opportunity and as such provides a good measure of the company s value in absolute terms. There are several approaches to discounted cash flow analysis, including Free Cash Flow to Firm (FCFF), Free Cash Flow to Equity (FCFE) and the Dividend Discount Model (DDM). The selection of a particular approach depends on the particular company being researched and valued. ERE: The Excess Return to Equity (ERE) method takes into consideration the absolute value of a company s return to equity in excess of its cost of equity discounted to the present day using the cost of equity. This methodology is more appropriate for valuing banking stocks than FCFF or FCFE methodologies. Relative valuation: In relative valuation, various comparative multiples or ratios including Price/Earnings, Price/Sales, EV/Sales, EV/EBITDA, Price/Book Value are used to assess the relative worth of companies which operate in the same industry/industries and are thereby in the same peer group. Generally our approach involves the use of two multiples to estimate the relative valuation of a stock. Other methodologies such as DuPont Analysis, CFROI, NAV and Sum-of-the-Parts (SOTP) are applied where appropriate. Stock ratings Strong Buy recommendations are expected to improve, based on consideration of the fundamental view and the currency impact (where applicable) by at least 15%. Market-perform recommendations are expected to improve, based on consideration of the fundamental view and the currency impact (where applicable) between 5% and 15%. Underperform recommendations are expected to improve up to 5% or deteriorate, based on consideration of the fundamental view and the currency impact (where applicable). Analyst Certification I/We, Research Analysts and authors, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject 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: Khambatta Securities Limited (Khambatta Securities) is a full-service, integrated merchant banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. Khambatta Securities is one of the merchant bankers. 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