We maintain BUY rating (TP unchanged), for our top pick in the sector, as we believe that it has superior funding franchise which gives a solid margin profile to manage the crisis and recent initiatives by stretched corporate borrowers to deleverage their balance sheet should augur well for the bank reducing the potential loss default rates from current expected levels of the market. The gradual transition to a retail oriented business model is under way, which is a long-term positive.
Maintain BUY; a strong liability franchise available at inexpensive valuation
We maintain our BUY with TP at R340. We value (i) the bank at 2X book (adjusted for NPLs and subsidiaries) and 15X EPS for RoEs in the range of 15% and 13% CAGR in earnings (ii) international subsidiaries at 0.6X book (low growth and subdued RoEs) (iii) life insurance at R30/share. It remains our preferred idea in the banking space as we like the retail transition and focus towards low risk corporate business, strong CASA backing this growth on a profitable basis and improvement in RoEs over the medium term. We do see headwinds to the near term return ratios primarily led by elevated credit costs, but think the strong revenue profile should be able to handle the credit costs and there is negligible risk from the capital standpoint. Further, the bank has been quite open to selling its stake in various subsidiaries and this can help it withstand any unexpected shocks arising from the bank’s corporate loan portfolio.
Superior funding franchise across the country; on a par with the best of its peers
One of the biggest changes which we believe is less appreciated by the market is the improvement in the liability profile of the bank. ICICI Bank’s share and growth of low cost deposits is on a par with the best of its peer set. It is also one of the leading players in the payment space with strong share in debit, credit card and mobile platforms. The bank has been gaining market share in most states in the past few years. We see this as the most critical change as it lays the foundation to do low risk lending in the next cycle which implies that ICICI Bank would be amongst the last few to be impacted in the next cycle.
A few positive events are emerging on the asset side as well
Over the past few weeks, we have seen a few corporates taking serious steps to deleverage their balance sheets while the modifications to Minerals and Mining Act should reignite mergers and acquisitions. Further, the recent announcements in the steel sector should lower the lossgiven default from what is being expected today. This augurs well for the bank as well as its borrowers as the fear of high provisions has resulted in weak price performance over the past year. We remain conservative and do not build a sharp recovery in provisions over the next few quarters, but are nevertheless comforted by the bank’s strong pre-provisioning operating profits. We are building loan-loss provisions of 150bps for FY2016-17.
—Kotak Institutional Equities