Thursday, July 2, 2009

Company Review: ICICI Bank

ICICI Bank reported a 41.5% sequential decline in its net profit for Q4’09 to Rs7.4 billion and a 9.6% fall in the net profit for FY09 to Rs37.6 billion.
The decline was mainly due to higher tax expenses and lower non-interest income. The net interest income, on the other hand, rose 15% for FY09 to Rs83.7 billion as net interest margin increased from 2.2% in FY08 to 2.4% in FY09.
We believe the margins are unlikely to fall in the foreseeable future and will remain in the range of 2.5%–2.7% till FY2012 as the Bank boost its CASA ratio via branch expansion and repays its high-cost bulk deposits by Q3’10.
In FY09, the Bank’s NIM improved from 2.2% in FY08 to 2.4% as the cost of funds declined from 7.5% in FY08 to 7% in FY09. This decline in the funding costs was mainly due to increase in the CASA and sharp decline in the wholesale deposit rates.
Given the Bank’s aggressive growth strategy in the past and the current muted growth phase of the economy, investors’ concerns about the Bank’s asset quality and restructuring of assets continue.
We have valued ICICI Bank’s stock by using the sum-of-the-parts methodology. The standalone ICICI Bank has been valued at Rs485, assuming a 16.24% cost of equity and a 10.4% terminal growth rate.
The Bank’s overseas banking subsidiaries have been valued at 1.0x its FY10 books, leading to a valuation of Rs39.
ICICI Prudential Life has been valued at a new business achieved profit (NBAP) multiple of 17.5x, which is lower than the industry’s average on account of its aggressive growth in the past, which may affect the quality of underwriting. This gives the life insurance business a valuation of Rs138.
ICICI Lombard has been valued at Rs30 by assigning a multiple of 18x to its normalised profit. The AMC has been valued at 4.5% of its AUM, leading to a valuation of Rs12.
We have valued ICICI Securities and ICICI Securities Primary Dealership at Rs66, based on a target P/E multiple of 18x. This helps us arrive at the consolidated price of Rs. 785. Therefore, we give a HOLD rating to the stock.

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