17 January 2013 ICICI Bank

Set for the next leap

ICICI Bank

17 January 2013

Update | Sector: Financials

Sohail Halai ([email protected]) +91 22 3982 5430

Alpesh Mehta ([email protected]); + 91 22 3982 5415

ICICI Bank

17 January 2013 2

ICICI Bank : Set for the next leap

Page No.

Summary ............................................................................................................ 3

Story in charts ................................................................................................ 4-5

Core RoE on the upswing - expect 17%+ by FY15E ...................................... 6-8

RAM improves decisively: RoE improvement on the cards ...................... 9-13

Consistently delivering on asset quality................................................... 14-16

Gradual improvement in margins to continue ........................................ 17-18

CASA ratio improves 1.7x since FY08 ........................................................ 19-21

Loan growth revives – retail loan to gather momentum ....................... 22-23

Healthy core operations; RoA's improved decisively .............................. 24-27

Financials and valuation ........................................................................... 28-29

Investors are advised to refer through disclosures made at the end of the Research Report.

ICICI BankCMP: INR1,163 TP: INR1,400 Buy

Valuation summary (INR b)Y/E March 2013E 2014E 2015E

NII 138.0 168.0 201.5

OP 131.4 162.5 194.8

NP 81.3 100.2 120.6

NIM (%) 3.0 3.2 3.2

EPS (INR) 70.5 86.9 104.6

EPS Gr. (%) 25.8 23.2 20.3

BV/Sh. (INR)* 454.3 510.8 578.6

ROE (%) 14.6 16.1 17.2

ROA (%) 1.6 1.7 1.7

Payout (%) 30.0 30.0 30.0

Valuations

P/E (x) 16.5 13.4 11.1

P/BV (x) 2.1 1.9 1.6

Adj P/ABV (x) 2.2 1.9 1.6

*BV adjusted for investment in

susbdiaries, Prices adj for sub value

17 January 2013

Update | Sector: Financials

Set for the next leapExpect earnings CAGR of 23%+; Rising RoEs to drive more re-rating

ICICI Bank (ICICIBC) is expected to deliver EPS CAGR of 23%+ over FY12-15E, on a higher

base of 25%+ over FY10-12, driving up the core RoE from ~10% in FY10 to 17%+ in

FY15E. Importantly, the Tier 1 would remain strong at 10%+ at end-FY15.

With a market share of 4.2% in the domestic loans and largest branch network in the

private financials, above industry growth and favorable margins will drive earnings.

ICICIBC has managed the asset quality well during the last 18 months of pain in the

Indian economy. While FY14 will be critical to see the fate of few large exposures, the

bank is confident of tiding over this without any dent on its profitability. Recovery in

Indian economy / corporate capex will be viewed positive for ICICIBC.

Valuations for ICICIBC will evolve as it delivers RoE improvement over the next 2 years

(to come at the near sector averages). Importantly, it will have scope to further boost

its leverage as capital may get boost from return of capital by key subsidiaries.

Subsidiaries transform from being guzzlers to capital providers to parentICICIBC has not infused any capital in its subsidiaries for the past three years.

Corrective measures and consolidation has led to significant CRAR improvement

for ICICI UK and ICICI Canada. Presently, most of the bank's subsidiaries have

become self-sufficient. In the medium term, listing of life insurance business

[capital support of INR49b (our estimate) under Basel III] and repatriation of

capital from international subsidiaries will reduce capital charge ensuring

dilution-free growth.

Core operations improve decisively, core RoE to reach 17%+ by FY15EICICIBC's risk adjusted margins (RAM) have improved sharply from a low of 1% in

FY10 to 2.2% in FY12, led by a 95bp fall in credit cost and 25bp by margins

improvement. Despite lower growth in fee income, continuous margin

improvement (~50bp over FY12-15) and strong asset quality performance will

translate into strong RoA's of ~1.7% and core RoE is expected to improve to 17%+.

Significant improvement in asset quality in challenging timesEven in challenging times, ICICIBC exhibited strong performance in asset quality,

with GNPA percentage declining over the past 10 quarters and provision coverage

ratio increasing from 53% in FY09 to 79% in 1HFY13. With retail delinquencies at

its historic lows credit cost estimates of average 70bp over FY13E-15E, compared

to 40bp in FY12, is conservative and factors the higher stress in corporate portfolio

leaving lower downside risk to our estimates.

Structural changes to ensure higher return ratios; valuation attractiveReturn ratios are on an upward trajectory and structurally core operations of

ICICIBC has improved significantly, which would enable it to sustain the ratios.

Further unlocking of value from subsidiaries could lead to re-rating of the stock.

ICICIBC trades at near five-year average valuation, which is unwarranted

considering expected improvement in growth and RoE. Maintain Buy.

Stock performance (1 year)

Shareholding pattern %

As on Dec-12 Sep-12 Dec-11

Promoter 0.0 0.0 0.0

Dom. Inst 24.8 25.3 27.8

Foreign 66.5 65.8 61.8

Others 8.7 8.9 10.4

3

BSE Sensex S&P CNX19,964 6,039

Bloomberg ICICIBC IN

Equity Shares (m) 1,152.8

M.Cap. (INR b)/(USD b) 1,359/24

52-Week Range (INR) 1,210/762

1,6,12 Rel.Perf.(%) -2/7/27

ICICI Bank

17 January 2013 4

Story in charts Core operations have improved decisively...

Sharp improvement in liability profile and...

… Better risk management and focused growth (secured

loans)…

… is Yielding results now; margins have improved

structurally

… and credit cost is coming down

Cutting excess flab helped to improve/maintain ROA…

… despite being dragged down by fees; expect

contribution to stabilize

Sharp improvement in CASA ratio, 1.7x since FY08 Asset quality showing sharp improvement

Focused strategies leading to sharp improvement in NIM… … and fall in credit cost

Source: Company, MOSL

Lean cost structure now - Adopted branch banking model Fees growth expected to track balance sheet growth

ICICI Bank

17 January 2013 5

Story in charts ... increasing leverage to boost RoEs

Core operations driving ROAs improvement….

…. Improving leverage will lead to core ROE of 17%+ by

FY15

Subsidiaries adequately capitalized; unlikely to need

capital anytime soon…

… capital repatriation and stake sale in insurance to lead

to improvement in Tier I in FY15

Trading at near LPA multiple expect re-rating as RoE's

evolve over next 2 years

NIM and Credit cost driving ROA higher RoE on an upward trajectory

Investment in subsidiaries likely to decline BASEL III: Adequately capitalized till FY15


With a better RoE, PE below LPA; PBV at LPA

For illustrative purpose only, capitalization under BASEL III.

ICICI Bank

17 January 2013 6

Moderation in growth and higher capital requirement brought RoEs lowerThough over FY03-05, ICICIBC reported an average RoE of ~20%, frequent dilutions

(FY05, FY06 and FY08) and consolidation in balance sheet over FY08-10 (post asset

quality issue in FY08) lowered the core RoE to 10% in FY10. The bank raised INR32.5b,

INR78.2b and INR194b in FY05, FY06 and FY08 respectively taking the cumulative capital

infusion to INR305b (~50% of existing net worth). The need to raise capital was 1) to

support domestic business growth and 2) enhance capital in subsidiaries (investment

of INR100b over FY06-10).

Core RoE on the upswing - expect 17%+ by FY15ESubsidiaries: From capital guzzlers to capital providers for lending business

ICICIBC's core operations have turned around and RoA has improved to 1.5%+ in FY12 led

by 1) higher margins, 2) sharp fall in credit cost and 3) control over opex. However, core

RoE improvement was restricted to just 13% due to strong capitalization (Tier I ratio -

12.5%+).

Improving margins are likely to compensate for any uptick in credit cost. Fee income

growth is expected to track balance sheet growth and as the benefit of correcting operating

inefficiencies is already reaped, fees and opex are unlikely to contribute meaningfully to

RoA improvement. Overall, we expect core RoA to improve to 1.7%+. As ICICIBC would

continue to leverage, core RoE is expected to improve to 17%+ by FY15E.

Subsidiaries have become self-sufficient in funding their own growth. From being capital

guzzlers, they would provide capital to fund the bank’s core lending business.

Cumulative capital

infusion over FY06-08

was of INR305b (~50% of

existing net worth)

International subsidiaries adequately capitalized; Repatriation to boostcapitalizationICICIBC has not infused any capital in the international banking subsidiaries for the

past three years. Decline in balance sheet, lower MTM losses and internal accruals

led to significant improvement in capital adequacy ratios for ICICI UK and ICICI Canada

from 17.3% and 23.4% in FY10 to 33.6% and 34.1% in 2QFY13. ICICI Eurasia's CAR also

stands comfortable at 35%. With moderate growth plans for Canada and the UK

subsidiaries, ICICIBC mulls to repatriate excess capital from these subsidiaries.

Once capital is brought back into the parent company, it shall not only translate to

higher RoEs for international subsidiaries but also provide cushion to parent

Capitalization. The bank can potentially repatriate at least half of the capital ie US$350m

from the UK and CAD$500m from Canada. Thus, almost INR42b can be repatriated.

On a standalone basis, ICICIBC deducts 50% of the invested capital (i.e INR28b) in

Canada and UK Subs from Tier I capital and rest from Tier II capital. With repatriation

(assuming 50%), it would eventually give a benefit of INR14b to Tier I under current

Base II norms and INR28b under Basel III (whereby the entire investment in a subsidiary

has to be deducted from Tier I capital).

Repatriation of capital

would give a benefit of

INR14b to Tier I under

current Base II norms and

INR28b under Basel III

ICICI Bank

17 January 2013 7

... and capital gains from ICICI Prulife will keep capitalization healthyListing of the insurance venture too shall bring capital for the bank. Based on our current

estimates, it can almost bring INR49b (based on FY15E) potential capital to ICICIBC. Of

this, INR41b would be capital gains which will be directly added to net worth and Tier I

capital. Currently, the principal amount of INR8.2b (for 23% stake) is deducted from Tier

I and Tier II capital both in equal proportion. But under Basel III, the entire amount

would be deducted from Tier I. Hence, under Basel III, overall Tier I capital addition is

likely to be INR49b (INR41b capital gains plus INR8.2b deducted from Tier I) in FY15E.

Under Basel III, overall

Tier I capital addition is

likely to be INR49b

(INR41b capital gains plus

INR8.2b deducted from

Tier I) from insurance

stake sale

Basel III: Adequately capitalized at least till FY16E (INR m)

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Assets 3,633,997 4,062,337 4,736,471 5,295,169 6,293,773 7,532,673 9,039,207 10,847,049 13,016,459

Growth 12 17 12 19 20 20 20 20

RWA 2,941,810 3,414,980 3,985,858 4,561,919 5,548,117 6,790,891 8,149,070 9,778,884 11,734,660

As a % of Assets 81 84 84 86 88 90 90 90 90

RoA 1.1 1.3 1.5 1.6 1.7 1.7 1.7 1.7 1.7

Payout 33 31 29 30 30 30 30 30 30

Tier I Capital 410,620 449,750 505,183 566,595 568,292 724,248 818,042 930,595 1,065,658

Deductions 123,696 118,882 108,531 99,891 163,221 124,082 124,082 124,082 124,082

Investments in subs 64,116 65,412 65,831 65,831 131,661 95,022 95,022 95,022 95,022

Securitisation 36,170 23,590 13,640 5,000 2,500 0 0 0 0

DTA and Others 23,410 29,880 29,060 29,060 29,060 29,060 29,060 29,060 29,060

Tier I Capital 14.0 13.2 12.7 12.4 10.2 10.7 10.0 9.5 9.1

Tier I under Basel II Guidelines 11.2

Impact of Basel III (in bp) 99

Note: For illustrative purpose only Source: Company, MOSL

Impact of higher deduction

is 1% on Tier I capital

Addition to Tier I capital of INR41b

due to insurance stake sale

Lower deduction on account of insurance stake

sale of INR8b and capital repatriation of INR28b

Adequately

capitalized till FY16

Unlikely to raise capital till FY16E, unless growth outlook revives sharplyUnder Basel III, the bank is likely to take a capital charge of ~100bp, mainly due to

higher deduction of investment in subsidiaries. Repatriation of capital and reduction

in ICICI Prulife’s stake could lead to addition of ~INR41b to net worth and release of

INR36b capital charge while calculating CAR (under Basel III). Hence, we believe ICICIBC

is unlikely to raise capital till FY16. Our base case assumption factors ~20% CAGR in

risk weighted assets, insurance stake sale in FY15E and repatriation of capital from

the UK and Canadian subsidiaries.

ICICI Bank

17 January 2013 8

Business growth and profitability declined over FY08-10 (%) Expect core RoE to reach 17%+


Expect proportion of investment in subsidiaries (as a % of overall22% of the networth invested in to subsidiaries (INR b) networth) to come down (%)

Incremental capital infusion in subsidiaries (INR b)

FY07 FY08 FY09 FY10 FY11 FY12

ICICI Pru Life Ins 6.6 12.1 8.6 - - -

ICICI Lombard Gen Ins. 0.7 5.5 3.0 - 2.5 -

ICICI Pru AMC 0.5 - - - - -

ICICI Ventures - - - - - -

ICICI Securities - 2.4 - - - -

ICICI Home Finance 3.0 5.0 3.1 - - -

ICICI Bank UK - 17.7 - - - -

ICICI Bank Canada 4.0 9.5 20.0 - - -

Overall Investments 14.8 52.2 34.7 - 2.5 -

% of Netowrth 6.1 11.2 7.1 - 0.5 -

Networth 244 466 490 516 551 596


Equity dilution of

16.317.2

19.2

Frequent equity dilution for growth and capital requirementof subsidiaries (INR b)

ICICI Bank

17 January 2013 9

Sharp improvement in core profitability driven by focused strategiesICICIBC shifted its focus from aggressive growth (at times sacrificing profitability) and

market share to improving profitability even at the cost of growth. Over FY08-10,

sharp increase in slippages and moderate growth led to higher credit cost of 1.7%,

against an average of 0.5% over FY04-07, whereby RAM moderated to 1% in FY10 v/s

1.4% in FY07. While margins continued to improve post FY08 (NII/average asset

improved from 1.9% in FY07 to 2.2% in FY10) led by an improvement in liability profile,

moderation in growth and benefit of capital raising, higher credit cost kept RAM low

at less than 1.3% over FY08-10. To improve core operating profitability, management

adopted the following strategies:

(A) Unsecured retail loans trimmed to improve asset qualityTo build a healthy loan portfolio and resolve asset quality issues, ICICIBC reworked its

strategy by running down unsecured retail loan portfolio in favor of low-risk secured

loans and corporate loans. Thus, unsecured proportion of retail loans declined from

9.8% (INR220b) in FY08 to ~1.3% (INR35b) at end-FY12. A shift in portfolio mix towards

secured loans, tighter risk management practices and business loan sourcing via owned

branches instead of DSAs led to better credit appraisal and improvement in asset

quality. Hence, even in a phase of economic moderation, GNPAs declined from 4.6%

in FY10 to 3.1% at end-2HFY13, while NNPAs were down sharply to 66bp, against 1.9%.

RAM improves decisively: RoE improvement on the cardsTight control on opex compensated for muted fee income growth

De-risking loan portfolio by reducing proportion of unsecured loans Credit cost declined sharply (%)

Credit cost remained high over FY08-10 due to higher NPAs provision coupled with contracting balance sheet. Benign asset quality in retail

segment and higher proportion of secured loans led to strong asset quality performance over the past 8 quarters.

ICICIBC’s risk adjusted margin (RAM) has improved sharply from a low of 1% in FY10 to 2.2%

in FY12, of which 95bp is led by a sharp fall in credit cost (due to fall in proportion of unsecured

personal loans and credit cards and strong asset quality performance in corporate segment).

Addressing structural issues in the balance sheet and improvement in liability profile led to

a improvement in NIMs of 25bp over FY10-12. Cutting excess flab in the system drove

down cost to core income ratio to ~43% from highs of 58% in FY07.

Overall core PBT (core operating profit less NPA provisions) as a percentage to average

assets has improved to 1.9%+ in FY12 v/s 95bp over FY08-10. Despite a challenging scenario

to generate fee-based income, further improvement in margins and healthy asset quality

performance would keep core PBT strong over FY12-15E.

Increase in credit cost

impacted profitability.

Consolidation for

structural improvement

in balance sheet became

a key mantra.

Unsecured proportion of

loans declined from ~10%

(INR220b) to ~1.3%

(INR35b) at end-FY12

ICICI Bank

17 January 2013 10

(B) Structural issues in balance sheet effectively dealt withLower CASA ratio, higher ALM mismatches (both domestic and overseas book), rising

share of international loans and overall aggressive growth leading to higher PSL

requirements etc kept margins lower till FY07 for ICICIBC, despite sharp increase in

high yielding unsecured retail loans. During the liquidity crisis period, margins fell

sharply due to higher roll-over cost of bulk deposits. Even aggressive growth in the

past, which led to risky underwriting, backfired leading to higher NPAs and interest

reversal. To improve margins, management focused on (a) improving CASA ratio (up

from 26% in FY08 to 40%+) and (b) reducing ALM mismatches. Strategies worked and

NIMs improved by 25bp despite higher NPAs in unsecured retail loans.

Continuous improvement in NII to average assets (%)

Share of CASA ratio improved significantly (%) CASA deposits improved while loans declined in FY10 (INR b)

Proportion of working capital finance rise; mismatches reduced considerablyICICIBC had a mismatched ALM in FY08, with 65%+ of deposits maturing within a year,

corresponding to only ~30% of loans maturing within the same period. However, it

increased the proportion of working capital finance to the corporate segment and

reduced exposure to short term bulk deposits, which resulted in a well-matched

ALM. Hence, the share of deposits maturing within a year declined to 48% in FY12,

while share of loans maturing within a year was stable at 29%.

Margins remained in a

narrow range of 2.1-2.3%

over FY08-10. A sharp

improvement in CASA

ratio during the

consolidation phase led

to structurally higher

NIMs even as the bank

reduced its high-yielding

unsecured loan portfolio

Focus on improving CASA

and reducing ALM

mismatches yielded

results


ALM improved

significantly as bank

reduced its dependence

on short term bulk

deposits

ICICI Bank

17 January 2013 11

(C) Focus on shedding excess flab; shift from agency model to branch bankingOf the 5C’s strategy introduced in FY08, improving cost efficiency was one of the

bank’s key focus areas. In the process, ICICIBC moved from an agency model to branch

banking to increase utilization of branches and tighten its risk management practices.

This also gave an opportunity to reduce opex as commission to DMA, which formed

25% of other operating expenditure, was significantly brought down to just 4% of

other opex. During FY08-12, operating expenses were largely flat, led by an 8% CAGR

decline in other operating expenses. Despite the sharp increase in branch network

and addition of Bank of Rajasthan over FY08-12, other operating expenses to average

assets ratio declined to 100bp, against 163bp in FY08 (DMA expenses which formed

40bp of average assets is now negligible).

ALM Profile: Gap in less than one year bucket reduced considerably

FY07 FY08 FY09 FY10 FY11 FY12

< 1 1yr - > 3 < 1 1yr > 3 < 1 1yr > 3 < 1 1yr > 3 < 1 1yr - > 3 < 1 1yr > 3

yr 3 yr yrs yr - 3 yr yrs yr - 3 yr yrs yr - 3 yr yrs yr 3 yr yrs yr - 3 yr yrs

Deposits 68.9 29.2 1.9 64.8 33.2 2.0 65.8 33.5 0.7 48.0 51.0 1.0 44.1 52.2 3.7 48.1 27.0 24.9

Borrowings 41.3 30.9 27.8 41.7 26.9 31.4 32.5 35.7 31.8 27.1 32.1 40.7 34.1 20.9 45.0 46.4 12.4 41.2

Advances 28.1 39.0 32.9 30.7 34.3 35.0 24.0 40.6 35.3 32.0 39.4 28.6 30.7 41.1 28.2 29.2 41.1 29.7

Investments 54.7 17.1 28.1 57.0 18.7 24.3 42.4 25.3 32.3 43.4 24.5 32.1 35.6 26.7 37.7 44.7 15.4 40.0


Strong control over opex… (%)

Bank continues to grow

organically as well as

inorganically. Branch

network is 2x+ FY08

… despite rapid branch expansion is commendable (nos)

*Out of which 450 was on account of Bank of Rajasthan merger Source: Company, MOSL

ICICIBC derived

significant gains from

transiting to branch

banking model as against

agency model adopted

earlier

Despite the sharp

increase in branch

network and addition of

Bank of Rajasthan over

FY08-12, other operating

expenses to average

assets ratio declined to

100bp, against 163bp in

FY08

Addition of

507 branches

Addition of

154 branches

Addition of

291 branches

Addition of

822 branches*

Addition of

213 branches

ICICI Bank

17 January 2013 12

Cost to core income ratio improved from ~58% in FY07 to 43% in FY12, while cost to

average assets ratio declined from 2.2% in FY07 to 1.8% in FY12 (compared to 280bp

for HDFCB and 230bp for AXSB) – the best among peers. The lower cost to average

assets ratio is partially led by higher share of international business (25%), compared

to peers.

Sharp improvement in cost to core income ratio (%) Cost to average assets ratio compared to peers (%)

While the cost to average assets ratio increased for peers over FY09-12, ICICIBC reported a sharp improvement and is now the best among peers.

Moderation in balance sheet growth; core profitability improved sharply...As mentioned earlier, ICICIBC effectively used the consolidation in business growth

phase (during FY08-10) to improve its balance sheet profile, address structural ALM

issues, improve risk management practices (credit cost declined to 40bp in FY12,

against 1.2% in FY08), shed excess flab in the system (cost to average asset ratio of

1.8% v/s 2.2% in FY08), reduce the risk on international subs books and for branch

expansion. Combination of these factors led to a sharp improvement in core

profitability, whereby RoA improved to 1.5% v/s 1.1% in FY10, despite pressure on

trading gains and fee income.

NIMs and opex control led to stable RoA (%) Asset quality and margins drive RoA (%)

Cost to average assets

best among peers

FY08-10: opex control

helped maintain RoA.

FY10-12: Sharp reduction

in credit cost drove

RoAs high

Blue indicates positive contribution to RoA; Black indicates negative carry on RoA's Source: Company, MOSL

Domestic cost to core income

ratio is at 47%, in our view

ICICI Bank

17 January 2013 13

…despite fee income being a drag on RoAFee income CAGR over FY08-12 was near zero, compared to balance sheet growth of

4.5%+ over the same period. Thus, fee income to average assets ratio gradually declined

from 1.8% in FY08 to 1.5% in FY12 and dragged RoA lower. Deceleration in balance

sheet (especially retail loans), decline in commission from distribution of third party

products and challenging macro environment (lower syndication and capital market

related fees) led to muted fee income performance over FY08-12.

Fee income growth continues to lag loan growth

Deceleration in balance

sheet and decline in

commissions led to lower

fee income growth

Fee income to average assets ratio lower comparedFee income expected to improve over FY13E-15E to peers – scope for improvement (%)


1.51.7

1.3

1.61.8 1.8

1.4

1.7 1.7

ICICIBC HDFCB AXSB

FY04-08 FY09-12 FY13-15E

ICICI Bank

17 January 2013 14

Cushion built by improving PCR; Healthy asset quality performanceAggressive growth in unsecured segment (over FY04-08) followed by moderation in

economic growth exerted pressure on asset quality, with the slippage ratio increasing

to 2.6% over FY09/10, against an average of 1.8% during FY04-08. Overall GNPAs posted

26% CAGR rise over FY07-10, led by 28% CAGR in retail segment GNPAs. However post

FY10, improved risk management practices and sharp reduction in unsecured personal

loans helped bank to show a continuous improvement in asset quality (GNPA %

declining over past ten quarters). And to provide adequate cushion to the balance

sheet, bank prudently increased its provision coverage ratio from 51% in 2QFY10 to

79% (one of the best in the industry) which provides comfort. In our view, benign

asset quality trend in the retail segment and cautious approach adopted would keep

ICICIBC’s asset quality healthy.

Consistently delivering on asset qualityEstimate credit cost of 70bp over FY13-15E

Consistent improvement in asset quality amidst tough macro Net slippage ratio declined sharply over FY10-12

Lower share of unsecured personal loans coupled with improved risk management practices

has helped ICICIBC to show a continuous improvement in asset quality (GNPAs percentage

declining over the past 10 quarters) even in a challenging macro environment.

Retail delinquency is at its historic lows leading to lower credit cost. ICICIBC has utilized this

opportunity to shore up its provision coverage ratio from 53% in FY09 to 79% in 1HFY13. We

are factoring a credit cost of 70bp in the overall portfolio for FY13E. Of which, if we assume

credit cost of 50bp on corporate loan portfolio (given very low delinquency in retail and

international portfolio) and with a 75% PCR, it implies net slippage ratio of 1.75%, which is

fairly conservative in our view.

While some stress in the large corporate segment may emanate, historic performance of

managing stress accounts viz. Kingfisher and Deccan Chronicle and lower restructured loan

portfolio should be given due credit. We estimate credit cost to increase to an average of

70bp over FY13E-15E, compared to 40bp in FY12. However, it would be offset by higher

NIMs and RAM is expected to remain healthy at 2.4%+ over FY13-15E v/s 2.2% in FY12.

Improvement in asset

mix, better risk

management practies

led to fall in GNPAs


ICICI Bank

17 January 2013 15

Strong growth in corporate segment over FY09-12While overall loans clocked a CAGR of 5% over FY09-12, higher growth came from

domestic corporate segment (CAGR of 30%+ over FY09-12), and its share in overall

loans increased from 12% at end-FY08 to 23% at end-FY12. International portfolio and

SME CAGR over FY09-12 was at just 8% and 15% respectively. On a sector-wise analysis,

key growth drivers for ICICIBC over FY09-12 were 1) power (~38% CAGR and now

forms 5.4% of overall loans), 2) infrastructure (24% CAGR and now forms 6.9% of

overall loans) and 3) services – finance (26% CAGR and now forms 6% of overall loans).

Due to challenging macro environment and infrastructure related issues, strong

growth in corporate segment (especially power and infrastructure) remains a risk.

However, asset quality performance so far increases confidence.

Sector-wise GNPAs exhibits healthy trend

% of overall loans CAGR % GNPA

FY12 FY09 FY10 FY11 FY12 over FY09 FY10 FY11 FY12

(INR m) FY09-12

Services- Non Finance 194,810 7.5 7.2 7.7 7.4 5 0.2 0.3 0.2 0.2

Infrastructure 181,960 4.2 5.5 5.8 6.9 24 N.A. N.A. N.A. N.A.

Iron/steel and products 122,310 4.4 4.6 4.2 4.7 7 0.4 1.7 0.2 0.8

Services – finance 156,410 3.5 3.4 7.2 6.0 26 1.7 3.8 1.4 0.7

Food and beverages 67,790 2.4 3.3 3.1 2.6 8 1.9 2.6 4.1 3.9

Power 141,240 2.4 3.0 4.4 5.4 38 0.3 0.2 0.2 0.1

Chemical and fertilizers 34,980 2.3 2.5 1.3 1.3 -12 3.8 5.3 7.0 4.5

Wholesale/retail trade 50,060 1.2 2.4 2.3 1.9 24 5.6 4.9 7.4 4.2

Electronics and engineering 56,610 1.6 1.7 2.0 2.2 16 2.2 2.2 1.5 4.2

Construction 57,970 1.1 1.0 1.6 2.2 34 N.A. N.A. N.A. N.A.

Mining 84,030 0.0 0.2 1.8 3.2 329 N.A. N.A. N.A. N.A.


Power projects in which ICICIBC participated have a DSCR of 1.5x+ and the average

break-even PLF is ~60%. Of the total power sector exposure, ~30-35% is in the nature

of working capital facilities. Of the project finance exposure, ~65% is covered by

PPAs. Of the total project finance facilities to thermal power generation sector, ~45-

50% of the exposure is based on captive coal. Thus, stress remains manageable.

Healthy performance in retail and international portfoliosRetail delinquency is at its historic lows and is also evident in performance of some

peers viz. HDFCB and IIB which are predominantly a retail lender. While credit cost on

retail portfolio would be negligible for FY13, we factor credit cost of 70bp (in line with

management guidance) for the overall portfolio for FY13. Lower credit cost on retail

loans is also driven by healthy recoveries from written off retail accounts in the past.

The international portfolio (25% of overall) is also exhibiting strong performance.

Thus, estimated credit cost would largely (assuming 50bp of 70bp) pertain to domestic

corporate/other loans (40% of overall). This implies credit cost of 125bp on corporate/

other loan portfolio and with an assumption of 75% PCR, it implies net slippage ratio

of 1.7%, which is conservative in our view.

Increase in infrastructure

and power segment has

raised concerns;

performance so far better

than expectation

Credit cost of 125bp on

corporate/other loan

portfolio and with an

assumption of 75% PCR, it

implies net slippage ratio

of 1.7%, which is

conservative in our view

ICICI Bank

17 January 2013 16

Proactive recognition of NPAs; lower restructured loansICICIBC’s handling of some stress accounts viz. Kingfisher and Deccan Chronicle

(proactively recognized and provided 85% on the same) and lower restructured loans

(1.5% of overall loans) should be given due credit. If stress in the environment

continues, then slippages are bound to increase (though manageable considering

performance so far) and have been adequately factored. We assume credit cost at an

average of 70bp over FY13E-15E, compared to 40bp in FY12. However, it would be

offset by higher NIMs and RAM is expected to remain healthy at ~2.4% over FY12-15E.

Proporation of restructured loans remains low Credit cost contained even as bank continues to shore up PCR

RAM at 5-year high… …and strong performance is expected to continue


RAM improves sharply by 170bp, from its bottom, and at 5-year high. Strong asset quality performance coupled with structural improvement

in NIMs led to higher RAM

(%)

76.6

Risk adjusted margin (%)Risk adjusted margin (%)

ICICI Bank

17 January 2013 17

Focus on core liabilities; CASA growth maintains pace on a higher baseOne of the key success factors to improve bank’s margins has been the drastic

improvement in liability profile. We believe improvement in CASA ratio has been a

key driver for margin improvement and has also negated the impact of falling

proportion of high yielding unsecured retail loan. With balance sheet growth resuming,

we believe further improvement in CASA ratio is unlikely; however, strong branch

expansion and technology upgradation would help ICICIBC to keep the CASA growth

pace in line with overall balance sheet growth.

Winding up of margin-dilutive unsecured loan book behindWith unsecured loan book at ~1.3% of the overall loan book, the pace of decline in

high-yielding loans is largely behind. Further, NPAs from unsecured retail loans also

led to higher accumulation of non-interest bearing assets in the balance sheet. As the

large write-offs have already taken place and asset quality is showing positive trend,

we believe it shall provide a cushion to margins.

Securitization losses to decline, leading to margins improvement of 5bpsICICIBC had aggressively securitized its retail loan portfolio over FY04-07 and with an

increase in delinquency ratio, securitized losses increased. Over FY08-11, the bank

booked losses on securitization of INR5b per year, which had a negative impact of

~15bp on margins; losses declined to INR2b in FY12 and the negative impact on margins

was 5bp. In FY13E, securitization losses are expected to be negligible and thus would

further aid margins expansion.

ALM issues resolved in international balance sheetInternational margins have already bounced back to 1.4% in 1HFY13, against an average

of ~85bp in FY11 and 1.25% in FY12. While further improvement would be a challenge,

if maintained at similar levels going forward, it would translate into 15bp improvement

in international NIMs over FY13 and provide a cushion to global margins.

Gradual improvement in margins to continueALM in better shape

Structural improvement in liability profile (CASA ratio improved to 40%+ in FY12 v/s 26% in

FY08) and lower securitization losses drove NIMs from 2.2% in FY08 to 2.7% in FY12 and 3%

in 1HFY13 – domestic NIMs are much higher at 3.4% at end-2QFY13.

In the backdrop of ICICIBC winding up high yielding unsecured loans (now 1.3% of overall

loans, against ~9.8% in FY08) in favor of lower yielding corporate and secured loans, NIMs

performance becomes more commendable.

With higher CASA ratio at 40%+, well-matched ALM, no securitization losses and stable/

falling share of international loans with relatively higher margins than past, overall margins

are expected to improve in FY13E-15E. We expect FY13E NIMs to be higher at 3% and

improve further 3.2% over FY14E-15E.

Benefit of improved

liability profile will

continue

In FY13E, securitization

losses are expected to be

negligible and thus

would further aid

margins expansion.

International margins to

improve further

ICICI Bank

17 January 2013 18

Higher margin domestic business to grow faster than international businessICICIBC has identified secured retail loans and domestic corporate loans as the key

focus area for growth. Management is not very optimistic on growth in the

international portfolio. Growth in retail loans has already started showing traction

and domestic corporate growth remains strong driven by working capital requirements.

In our view, for every 5% change in the mix, reported margins shall show an

improvement of 10bp in overall margins.

With an improvement in liability profile, CoF increase has been Margins at historically high level but expectedrestricted, thus providing a cushion to margins (%) to improve further (%)


Both domestic and international NIMs haveStructurally moving to higher NIMs (%) improved significantly (%)

ICICI Bank

17 January 2013 19

CASA ratio improves 1.7x since FY08Branch expansion and use of superior technology to keep CASA ratio healthy

Over FY08-12, while CASA CAGR was 15%, overall deposits were flat leading to higher CASA

ratio of 40%+ in FY12 as against 26% in FY08.

Strong branch additions over the past two years, increasing branch productivity and qualitative

balance sheet growth would keep CASA ratio strong at 39%+.

With ~15% of the branch network less than 18-24 months old (excluding the branches from

merger of BoR), incremental contribution from these branches are expected to increase

significantly as they ride through the cycle of maturity.

CASA growth remains healthy; CASA ratio improves 1.7x since FY08ICICIBC was in a consolidation mode over FY08-10 to realign its liability profile by

aggressively shedding short term bulk deposits and increasing thrust on CASA

mobilization. Over FY08-12, CASA CAGR was 15%, while overall deposits were flat and

provided fillip to CASA ratio which increased from 26% in FY08 to 40%+ in FY12. If we

see in isolation, term deposits at end-FY12 were still lower by ~19% than that in FY08,

which demonstrated the bank’s key focus to build a strong balance sheet rather than

chase growth. Strong branch additions over the past two years, increasing branch

productivity and qualitative balance sheet growth could keep CASA ratio strong at

39%+.

Aggressive shedding of bulk deposits and thrust on CASA… (%) …provided strong boost to CASA ratio

Impressive traction in SA deposits, 2x rise in branch network to provide fillipWith a revamp in its deposit-taking strategy, ICICIBC started refocusing on the branch

banking model instead of agency model followed earlier. Coupled with it, an increase

in branch network by 2x+ over FY08 to 2,700+ helped it increase the proportion of

retail deposits in its book. SA deposits’ growth rebounded sharply to ~28% over FY10/

11, against 5% in FY09 (though partially led by the financial crisis). Consequently,

percentage of SA deposits to total deposits increased to 30%, against 16% in FY08. We

expect SA deposits accretion to remain healthy at a CAGR of 17% over FY12/15.

Strong branch additions

over the past two years,

increasing branch

productivity and

qualitative balance sheet

growth led to strong

CASA ratio of 39%+

We expect SA deposits

accretion to remain

healthy at a CAGR of

17% over FY12/15.


ICICI Bank

17 January 2013 20

SA deposit growth lower than peers, but should be seen in the context of lower balance sheet growth as well (%)

SA deposit growth remains healthy Sharp rise in proportion of SA deposits in overall deposits (%)

Maturing branch network to aid CASA mobilizationDue to a strong expansion in branch network, ICICIBC’s CASA per branch declined

from INR734m in FY07 to INR420m in FY12 and remained low compared to AXSB’

INR607m and HDFCB’s INR527m. We note that the high difference in CASA per branch

is due to CA per branch, while the difference in SA deposit per branch is lower, with

SA deposits per branch for ICICIBC at INR288m per branch as against INR326m for

HDFCB and INR343m for AXSB. With nearly ~15% of the branch network less than 18-

24 months old (excluding branches from merger of BoR), incremental contribution

from these branches are expected to increase significantly as they ride through the

cycle of maturity. Further, the bank has guided for balance sheet growth to be in line

with industry/marginally above industry average, which should help it sustain a CASA

ratio at ~40%.

Merger of Bank of Rajasthan (BoR): ICICIBC merged BoR which had a branch network of 463 and total business of INR230b with

itself in August 2010. Over 60% of 463 BoR’s branches were in the state of Rajasthan which would provide ICICIBC a strong hold

in that region. Compared to ICICIBC, erstwhile BoR’s branches were grossly underutilized. BoR’s business per branch was

INR505m, compared to ICICIBC’s INR2.2b. With concentrated presence in northern India, ICICIBC would be able to benefit in the

longer time horizon.

(SA deposit growth) (Balance sheet growth)

Incremental contribution

from new branches are

expected to increase

significantly as they ride

through the cycle of

maturity


ICICI Bank

17 January 2013 21

Bank resorted to organic and inorganic expansion Branch addition remain strong (addition during the year)

* HDFC merger with CBOP; # ICICIBC merger with Bank of Rajasthan Source: Company, MOSL

Strong branch expansion and moderation in business led to CASA per branch low against peers’decline in CASA per branch (INR m) expect improvement (INR m)

CAGR of 22%

CAGR of 30%

ICICI Bank

17 January 2013 22

Domestic loan CAGR to remain healthy at 20%+ over FY12-15EPost consolidation over FY08-10, ICICIBC’s trend on the growth path was led by a

strong growth in corporate segment, which reported a CAGR of ~36% over FY10-12

compared to overall loan growth of 18%. The other key drivers for growth were SME

(36%+, albeit on a lower base) and CV loans (higher share of bought portfolio 19%+).

While the near term driver would continue to be corporate loans (working capital

loans and disbursements from past sanctions), increasing momentum in all segments

of secured retail portfolio is positive. We expect domestic loan CAGR to be at 20%+

over FY12-15E. Growth in international segment is likely to be opportunistic and we

factor 5% growth in FY13E and to be largely in line with overall growth for FY14E/15E.

Loan growth revives – retail loan to gather momentumHigher capitalization to ensure dilution-free growth

After a period of consolidation over FY08-10, the bank resumed on the growth path with a

loan CAGR of 18% over FY10/12. Initial phase of growth was driven by domestic corporate

loans (+36%); but in the past few quarters, retail segment too picked up with the entire

secured segment in retail showing signs of improvement.

Further, a drag on overall loans due to winding up of unsecured loans would be lower, with its

proportion to overall loans now being insignificant.

For FY12-15E, domestic loan growth is expected to post a CAGR of 20%+ and international loan

portfolio is expected to clock a CAGR of 15%. This would be supported by strong capitalization,

with CAR at 19% (of which Tier I is at 12.5%+). Further repatriation of capital from subsidiaries

and release of capital from insurance venture shall ensure dilution-free growth till FY16E.

Loan growth improves, expect to be in line with industry average Expect share of retail loans to stabilize (%)


Post consolidation, ICICIBC resumed on the growth path led by a growth in corporate segment

The near term loan

growth driver would be

corporate loans however

an increasing momentum

in all segments of

secured retail portfolio is

positive

Decline in share of retail loans to overall loans likely to be arrestedLed by higher repayments/writeoffs, retail loans declined by 15% CAGR over FY09-12

and at end-2QFY13 it formed ~34% of the overall loans, against 58% in FY08. Within

the retail segment, unsecured retail loan registered the sharpest fall of 40%+ over

FY09-12. However, in the past three quarters, loan book has stabilized indicating the

Retail loans to grow 17-

18% over FY12/15, against

5% CAGR over FY10-12

ICICI Bank

17 January 2013 23

Growth in retail segment moderates (YoY, %) Decline in unsecured personal loan has been arrested (%)


Drag on retail growth due to unsecured retail proportion behind, while housing and auto loan growth has improved in YTDFY12. With a

reversal in interest rate cycle and management focus, expect it to improve further

negative drag of it on overall loans seems to be limited in the future. Within retail,

growth in housing loan and auto/CV loan resumed to ~15% YoY in 1HFY13 (against a

decline of ~33% over FY08-10). We expect retail loans to grow 17-18% over FY12/15,

against 5% CAGR over FY10-12.

ICICI Bank

17 January 2013 24

Healthy core profitability; RoA's improved decisivelyValuations at LPA; will evolve as RoE's improve over next two years

Structural drivers for strong core operations (1) margin improvement (2) stable cost to average

assets and (3) healthy asset quality performance (though factored higher credit cost) should

enable bank to deliver core PBT of 2% - highest in last decade.

Fee income growth though is expected to improve, is conservatively factored in at lower than

balance sheet growth (CAGR of 13% v/s balance sheet CAGR of 17%), leading to negative carry

on RoA's.

RoA's have improved decisively and with increasing leverage, core RoE to improve to 17%+ by

FY15E. Further, with stock trading at LPA, we expect valuations to evolve as growth visibility

improves and RoE's increase.

Excess flab already shed; fee income growth to improve and its drag onRoA to reduceCommendable performance over cost helped the bank absorb impact of lower RAM

and muted fee income growth, thus keeping core-PBT largely stable at 90bp over

FY08-10. However, in our view, ICICIBC has utilized the benefit of cost reduction and

it is unlikely to drive RoA higher. With increasing branch presence, growing share of

retail business and higher employee base, we assume operating expense to register

17% CAGR over FY12-15E. However, cost to average assets ratio is expected to remain

stable at ~1.8% over FY13E/15E.

Factoring in fee income

growth of 18% in FY14/15 ,

however with recovery in

macro-economic

environement, corporate

fees could provide

upside

Despite moderation in

risk adjusted core

income, strong control

on opex kept core

profitability healthy over

FY08-10. Further increase

was led by strong

improvement in RAM

Structural improvements to aid core operating profit; NIMs expected toremain healthy, to drive core operating profitIn our view, structural drivers for strong operations are in place and the bank would

maintain core operating profit at 190bp+ over FY13E-15E. Though expected

improvement in NIMs and stable credit cost shall drive core operating profit, continued

pressure in fee income would negate the benefit to some extent. Further cushion to

RoA would be provided by improved contribution from non-core income (trading

gains and dividend from subs), which is expected to improve from just 18bp in FY12 to

30bp+ by FY15E.

Core PBT (as a % of average assets) to remain healthy


ICICI Bank

17 January 2013 25

Valuations will evolve as RoE's improve over next two yearsWhile RoA's has improved decisively to 1.5%+, lower leverage restricted improvement

in RoE. The bank has a CAR of 18.3%, with Tier I at 12.8%, which implies it is currently

under-leveraged (core) at 9.5x, compared to 11.x for HDFCB and 12.6x for AXSB. Going

forward, balance sheet size is expected to post a CAGR of 16%+ over FY12/15E and we

expect core leverage to increase to 11x. Increasing leverage would drive RoE's higher

to 17%+. Further, with ICICIBC trading at near LPA BV multiple, we expect valuations

will evolve as bank continue to deliver higher RoE's. Maintain Buy with a TP of 1,400.

RoA's have improved

decisively and increasing

leverage would be a key

for RoE improvement

ICICIBC has utilized the

benefit of cost reduction

and it is unlikely to drive

RoA higher

Fee income to average assets, cost to average assets ratios expected to remain stable


ICICI Bank: SOTP FY15ETotal Total Value per % of

Value Value Share Total

INR b USD b INR Value Rationale

ICICI Bank 1,334 24.3 1,157 82.7 2x FY15E BV ex Investment in key ventures;

Implied 12.4x core EPS

Key Ventures

ICICI Pru Life Insurance 159 2.9 138 9.8 Apprisal Value; 74% Economic stake

ICICI Bank Canada (100% Subsidiary) 52 0.9 45 3.2 1x FY15E BV

ICICI Bank UK (100% Subsidiary) 34 0.6 29 2.1 1x FY15E BV

ICICI Home Finance (100% Subsidiary) 32 0.6 28 2.0 2x FY15E BV

ICICI Pru Asset Management (51% stake) 19 0.3 16 1.2 Valued at 4% of Total AUM exp in FY15

ICICI Securities 14 0.3 12 0.9 12x FY15E PAT

ICICI Lombard General Insurance (74% stake) 19 0.3 16 1.2 1x FY15 Networth

ICICI Ventures 10 0.2 9 0.6 10% FY15E AUMs

ICICI Securities PD 10 0.2 9 0.6 1x FY15 Networth

Total Value of Ventures 348 6.3 302 21.6

Less: 20% holding Discount 70 1.3 60 4

Value of Key Ventures 278 5.1 241 17.3

Target Price Post 20% Holding Co. Disc. 1,612 29.4 1,399 100

Current Value 1,341 24.5 1,163

Upside - % 20.3 20.3 20.3

Target Price w/o 20% Holding Co. Disc. 1,682 30.7 1,459

CMP (INR) 1,341 24.5 1,163

Upside - % 25.4 25.4 25.4

Source: MOSL

ICICI Bank

17 January 2013 26

RoA improvement to be driven by core operating performance (%)

Y/E March FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Net Interest Income 1.92 2.13 1.86 1.89 1.96 2.15 2.19 2.34 2.44 2.75 2.90 2.91

Fee income 1.11 1.50 1.65 1.68 1.78 1.67 1.52 1.67 1.52 1.39 1.42 1.40

Core Operating Income 3.03 3.64 3.51 3.57 3.74 3.82 3.71 4.01 3.96 4.14 4.32 4.32

Operating Expenses 2.42 2.51 2.39 2.24 2.19 1.81 1.58 1.72 1.78 1.82 1.84 1.81

Employee cost 0.47 0.50 0.52 0.54 0.56 0.51 0.52 0.73 0.80 0.83 0.84 0.84

Other operating expenses 1.95 2.01 1.87 1.70 1.63 1.30 1.06 0.99 0.99 1.00 1.00 0.97

Core operating Profits 0.61 1.13 1.12 1.33 1.55 2.01 2.13 2.29 2.18 2.32 2.48 2.51

Non Core Other Income 1.53 0.89 0.73 0.64 0.59 0.28 0.49 0.06 0.18 0.30 0.33 0.31

Operating Profits 2.14 2.02 1.86 1.97 2.14 2.29 2.62 2.35 2.36 2.62 2.80 2.82

NPA provisions 0.40 -0.08 0.38 0.48 0.68 0.96 1.17 0.51 0.23 0.36 0.38 0.38

Other Provisions 0.10 0.38 0.00 0.27 0.10 0.01 0.01 0.08 0.13 0.04 0.06 0.06

Provisions 0.50 0.29 0.38 0.75 0.78 0.98 1.18 0.59 0.36 0.40 0.43 0.44

PBT 1.64 1.73 1.48 1.22 1.36 1.31 1.44 1.76 2.00 2.22 2.37 2.37

Tax 0.23 0.36 0.27 0.18 0.24 0.35 0.36 0.42 0.53 0.60 0.64 0.63

RoA 1.41 1.37 1.21 1.04 1.12 0.96 1.08 1.34 1.47 1.62 1.73 1.74

DuPont Comparison with peers (%)

Axis Bank HDFC Bank ICICI Bank

Average Average Average

FY04-07 FY08-12 FY13-15E FY04-07 FY08-12 FY13-15E FY04-07 FY08-12 FY13-15E

1) Net Interest Income 2.4 3.0 3.2 3.7 4.3 4.1 2.0 2.2 2.9

2) Fee income 1.2 1.8 1.8 1.6 1.8 1.7 1.5 1.6 1.4

Fee to core Income 34.1 37.4 36.1 30.4 29.3 29.3 43.2 42.4 33.0

Core operating Income 3.6 4.8 4.9 5.3 6.1 5.8 3.4 3.8 4.3

3) Operating Expenses 1.9 2.3 2.3 2.5 3.1 2.7 2.4 1.8 1.8

Cost to Core Income 53.3 47.8 45.5 48.2 50.3 45.4 69.6 47.2 42.9

Employee cost 0.6 0.8 0.8 0.7 1.2 1.1 0.5 0.6 0.8

Other operating expenses 1.3 1.5 1.4 1.8 1.9 1.6 1.9 1.2 1.0

Core Operating Profits 1.7 2.5 2.7 2.7 3.1 3.2 1.0 2.0 2.4

Trading and others 0.6 0.4 0.3 0.0 0.1 0.1 0.9 0.3 0.3

Operating Income 2.2 2.9 3.0 2.7 3.2 3.3 2.0 2.4 2.7

Provisions 0.5 0.6 0.5 0.7 1.0 0.5 0.5 0.8 0.4

4) NPA provisions 0.4 0.5 0.5 0.6 0.7 0.4 0.3 0.7 0.4

Other Provisions 0.1 0.1 0.1 0.1 0.3 0.1 0.2 0.1 0.1

PBT 1.7 2.2 2.5 2.0 2.2 2.8 1.5 1.6 2.3

Tax 0.6 0.8 0.8 0.6 0.7 0.9 0.3 0.4 0.6

Tax Rate 34.2 34.2 32.5 30.5 31.5 31.6 17.0 24.1 26.8

5) RoA 1.1 1.5 1.7 1.4 1.5 1.9 1.3 1.2 1.7


Comments 1): NII to average assets has improved, but remains low compared to peers due to higher share of international

portfolio. Domestic margins are at ~3.4%.

Comments 2): Fee income contribution to RoA lower than peers. Faster than expected economic recovery, leverage on strong

corporate relationship and improving growth in retail loan would gradually improve fee income contribution

Comments 3): Strong control on opex resulting in best-in-class cost to average asset ratio

Comments 4): Strong asset quality performance over past two years is commendable

Comments 5): RoAs has improved decisively and is now best in the class

ICICI Bank

17 January 2013 27

ICICIBC: One-year forward PBV and RoE ICICIBC: One-year forward PE and RoA

ICICIBC: One-year forward PBV ICICIBC: One-year forward PE

ICICI Bank

17 January 2013 28

Financials and Valuation

Income Statement (INR Million)

Y/E March 2010 2011 2012 2013E 2014E 2015E

Interest Income 257,069 259,741 335,427 404,434 456,258 544,608

Interest Expended 175,926 169,572 228,085 266,458 288,261 343,127

Net Interest Income 81,144 90,169 107,342 137,977 167,997 201,481

Change (%) -3.0 11.1 19.0 28.5 21.8 19.9

Other Income 74,777 66,479 75,028 84,902 101,331 118,395

Net Income 155,920 156,648 182,369 222,879 269,328 319,876

Change (%) -2.4 0.5 16.4 22.2 20.8 18.8

Operating Exp. 58,598 66,172 78,504 91,484 106,877 125,093

Operating Profits 97,322 90,475 103,865 131,395 162,450 194,784

Change (%) 9.0 -7.0 14.8 26.5 23.6 19.9

Provisions & Cont. 43,869 22,868 15,830 20,008 25,194 30,732

PBT 53,453 67,607 88,034 111,387 137,257 164,052

Tax 13,203 16,093 23,382 30,075 37,059 43,474

Tax Rate (%) 24.7 23.8 26.6 27.0 27.0 26.5

PAT 40,250 51,514 64,653 81,313 100,197 120,578

Change (%) 7.1 28.0 25.5 25.8 23.2 20.3

Dividend (Including Tax) 15,020 18,170 21,228 28,541 35,169 42,323

Core PPP* 85,512 92,625 103,995 125,895 154,950 187,284

Change (%) 0.8 8.3 12.3 21.1 23.1 20.9

*Core PPP is (NII+Fee income-Opex)

Balance Sheet (INR Million)

Y/E March 2010 2011 2012 2013E 2014E 2015E

Share Capital 14,649 15,018 15,028 15,028 15,028 15,028

Equity Share Capital 11,149 11,518 11,528 11,528 11,528 11,528

Preference Capital 3,500 3,500 3,500 3,500 3,500 3,500

Reserves & Surplus 505,035 539,391 592,525 645,297 710,325 788,580

Net Worth 519,684 554,409 607,552 660,324 725,352 803,608

Of which Equity Net Worth 516,184 550,909 604,052 656,824 721,852 800,108

Deposits 2,020,166 2,256,021 2,555,000 2,980,269 3,595,791 4,394,202

Change (%) -7.5 11.7 13.3 16.6 20.7 22.2

Of which CASA Deposits 842,158 1,016,465 1,110,194 1,240,225 1,451,924 1,699,998

Change (%) 34.4 20.7 9.2 11.7 17.1 17.1

Borrowings 939,136 1,092,043 1,398,149 1,461,891 1,742,093 2,058,712

Other Liabilities & Prov. 155,012 159,864 175,770 192,684 230,538 276,151

Total Liabilities 3,633,997 4,062,337 4,736,471 5,295,169 6,293,773 7,532,673

Current Assets 388,737 340,901 362,293 393,353 484,987 599,633

Investments 1,208,928 1,346,860 1,595,600 1,715,270 1,972,561 2,268,445

Change (%) 17.3 11.4 18.5 7.5 15.0 15.0

Loans 1,812,056 2,163,659 2,537,277 2,945,821 3,555,546 4,334,655

Change (%) -17.0 19.4 17.3 16.1 20.7 21.9

Net Fixed Assets 32,127 47,443 46,147 45,571 46,495 48,918

Other Assets 192,149 163,475 195,154 195,154 234,185 281,022

Total Assets 3,633,997 4,062,337 4,736,471 5,295,169 6,293,773 7,532,673

Asset Quality (%)

GNPA (INR m) 94,807 100,343 94,753 101,527 115,520 135,970

NNPA (INR m) 38,411 24,074 18,608 19,526 24,599 31,768

GNPA Ratio 5.1 4.5 3.6 3.4 3.2 3.1

NNPA Ratio 2.1 1.1 0.7 0.7 0.7 0.7

PCR (Excl Technical write off) 59.5 76.0 80.4 80.8 78.7 76.6

E: MOSL Estimates

NII CAGR of 23%+ over FY13-

15E on back of higher margins

and improving loan growth

Fee income growth to improve

On a higher base, PAT CAGR of

23% over FY12-15

Strong capitalization to ensure

dilution free growth

SA growth to remain healthy at

17%+ over FY13/15 and CASA

ratio to be strong at 39%+

Loan growth to improve led by

healthy growth in domestic

operations

ICICI Bank

17 January 2013 29

Financials and Valuation

Ratios

Y/E March 2010 2011 2012 2013E 2014E 2015E

Spreads Analysis (%)

Avg. Yield - Earning Assets 7.9 7.7 8.5 8.9 8.6 8.6

Avg. Yield on loans 8.7 8.3 9.4 10.1 9.6 9.6

Avg. Yield on Investments 5.8 6.2 6.6 6.7 6.7 6.7

Avg. Cost-Int. Bear. Liab. 5.2 4.8 5.7 5.8 5.4 5.6

Avg. Cost of Deposits 5.5 4.7 5.9 6.3 5.9 5.8

Interest Spread 2.7 2.9 2.8 3.1 3.2 3.0

Net Interest Margin 2.5 2.7 2.7 3.0 3.2 3.2

Profitability Ratios (%)

RoE 8.0 9.7 11.3 13.1 14.7 16.0

Adjusted RoE 9.6 11.5 12.8 14.6 16.1 17.2

RoA 1.1 1.3 1.5 1.6 1.7 1.7

Int. Expended/Int.Earned 68.4 65.3 68.0 65.9 63.2 63.0

Other Inc./Net Income 48.0 42.4 41.1 38.1 37.6 37.0

Efficiency Ratios (%)

Op. Exps./Net Income* 40.7 41.7 43.0 42.1 40.8 40.0

Empl. Cost/Op. Exps. 32.9 42.6 44.8 45.3 45.8 46.2

Busi. per Empl. (INR m) 99.8 72.4 81.6 88.9 98.8 112.8

NP per Empl. (INR lac) 9.8 9.0 11.1 13.1 15.1 17.1

* ex treasury

Asset-Liability Profile (%)

Loan/Deposit Ratio 89.7 95.9 99.3 98.8 98.9 98.6

CASA Ratio % 41.7 45.1 43.5 41.6 40.4 38.7

Invest./Deposit Ratio 59.8 59.7 62.5 57.6 54.9 51.6

G-Sec/Invest. Ratio 56.6 47.6 54.5 53.3 57.6 58.3

CAR (BASEL II) 19.4 19.5 18.5 17.6 15.8 14.2

Tier 1 14.4 13.2 12.7 12.2 11.2 10.3

Valuation

Book Value (INR) 463.0 478.7 516.6 562.4 618.8 686.7

BV Growth (%) 5.1 3.4 7.9 8.9 10.0 11.0

Price-BV (x) 2.3 2.1 1.9 1.7

ABV (for Subsidaries) (INR) 353.6 370.6 408.6 454.3 510.8 578.6

ABV Growth (%) 6.6 4.8 10.2 11.2 12.4 13.3

Price-ABV (x) 2.4 2.1 1.9 1.6

ABV (for Subs Invst & NPA) (INR) 329.5 356.0 397.3 442.5 495.8 559.3

Adjusted Price-ABV (x) 2.5 2.2 1.9 1.6

EPS (INR) 36.1 44.7 56.1 70.5 86.9 104.6

EPS Growth (%) 6.9 23.9 25.4 25.8 23.2 20.3

Price-Earnings (x) 20.7 16.5 13.4 11.1

Adj. Price-Earnings (x) 17.5 13.7 10.9 9.4

Dividend Per Share (INR) 12.0 14.0 16.5 21.2 26.1 31.4

Dividend Yield (%) 1.4 1.8 2.2 2.7

E: MOSL Estimates

Gradual improvement in

margin to continue, domestic

margin at historical high of

3.4%+ in 2QFY13

RoA's has improved decisively

to 1.6%+, increasing leverage

to boost RoE's to 17%+

Adequately capitalized till FY16

Trading at near LPA P/BV, with

evolving RoE's over next two

years valuations should

improve; Top Pick

Cost to income ratio expected

to decline gradually

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17 January 2013 ICICI Bank