Buy ICICI Bank - Prabhudas Lilladher

Pick-up in growth in domestic loon book: The banks domestic book has been showing growth pick up with 22.0% YoY and 7.0% q/q growth reported in 2QFY13 driven by domestic corporate and revival in growth in retail assets.

NIM continues to surprise: ICICI's margins have improved from 2.6-2.7% and management has now guided to steady state margins of at least 3%. With easing rates and higher growth in the domestic book (higher margins), we believe ICICI's NIM performance can further surprise the street.

Improving lending business return ratios: ICICI has been steadily closing the ROA/ROE gap v/s peers. ROAs have inched up from ~1.0% in FY09 to ~1.5% in FY12 and we expect margin expansion to drive ROAs to ~1.7%. Core lending business' ROEs is expected to improve from ~11% in FY10 to 15% in FY13/14.

Asset quality stable; some lumpy risks remain: We factor in ~90bps credit costs v/s management guidance of 75bps as we believe risks still remain from lumpy corporate exposures as the reform process has still not addressed power fuel/pricing issues. The asset quality trends from 2QFY13 results were comforting with Credit costs at ~75bps despite Rs4bn provision on Deccan.

Valuations: Current valuations are trading at 1.75x FY14 book and given improving ROEs and potential margin improvement we remain positive but the recent move have made risk-reward not as favorable as we see only ~10-12% upside from current levels after which a BUY reco will have to be based on Bull market valuations.

Source : Equity Bulls

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