Buy ICICI Bank - Microsec

We rate ICICI Bank Limited a BUY. The bank was promoted in 1994 by ICICI Ltd, an Indian financial institution. Presently, ICICI bank is India's largest Private Sector Bank with a balance sheet size of over Rs.6 trillions and a strong distribution network of 2755 branches and 9366 ATMs and also has a strong presence in 19 countries. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management.

Strong Balance Sheet and Improved Returns: ICICI Bank's continued focus on 5Cs strategy helped the bank to strengthen its business size and returns. It has doubled return on its behemoth ~Rs.6 trillion worth of assets within four years. Return on Assets (ROA) of the Bank stood at 1.40% in FY12 as compared to 0.70% in FY09. Moreover, Bank's Return on Equity (ROE) has improved by 623bps to 13.62% over the same period. We expect the company to deliver ROA of more than 1.5% and ROE more than 14% in next couple of financial years, backed by expectations of healthy loan growth coupled with stable credit cost and expenses.

Technological Initiative to Enhance Retail Book: Customer convenience and high quality services backed by strong distribution and innovative use of technology continued to be the bedrock of bank's growth strategy. Bank has launched 24x7 Electronic Branches in 25 centers in 18 locations in tier-I and II cities across the country and has launched its e-locker initiative servicing 1,000 customers, where customers can access their banking transaction by themselves. Moreover, ICICI Bank is also working to carry out transactions through social networking site "Facebook" to target the younger generation. We believe this move and strong branch expansion has positioned the company to gain both CASA and credit market share.

Improving Assets Quality: Despite the adverse asset quality cycle that the overall banking sector is facing, ICICI Bank has improved its asset quality with healthy Provision Coverage Ratio (PCR) of ~81%. It has improved GNPA and NNPA by 82 and 33bps respectively within a year. As of June 30, the company's GNPA and NNPA stood at 3.54% and 0.71% respectively. However, the bank is well positioned to absorb any substantial shock with ~81% of its PCR. We believe asset quality to remain impressive.

Loan Growth May Outpace Systemic Growth in FY13: Management sounded optimistic for FY13 loan growth in excess of systemic growth, backed by the expectation of significant traction towards segment of retail loans and domestic corporate loans.

Valuation

ICICI Bank's business structure and thoughtful business strategy has helped it to recover lost ground and now it is ready to shift into a higher growth trajectory. We believe that the substantial branch expansion along with the application of advanced and modern technology will give an edge over others, which should translate into higher valuation multiples.

At the CMP of INR1006.35, stock is trading at FY12 P/BV of 1.89x. The current valuation of 1.69x FY13E and 1.49x FY14E Book Value look attractive. We recommend a BUY on the stock with a target price of Rs.1204.67 (1.79x FY14E BV) with an upside of ~20% from the current level with an investment horizon of 12 months.

Key Concern

Further down turn in economic activity and growth may act as a vicious cycle on investment in Capex and consumer income and spending which may impact the earnings of the company and also risk its asset quality.

Source : Equity Bulls

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