ICICI Bank: Jefferies rates ‘buy’, says limited downside to stock from present levels

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Published: April 9, 2018 12:42:51 AM

ICICI Bank faces allegations of malpractice & conflict of interest involving the CEO. Media reports suggest a preliminary inquiry has been filed; overhang to continue until a speedy investigation & closure is reached.

ICICI Bank, Jefferies, Videocon, ICICI Bank rating, markets newsICICI Bank faces allegations of malpractice & conflict of interest involving the CEO. Media reports suggest a preliminary inquiry has been filed; overhang to continue until a speedy investigation & closure is reached.

ICICI Bank faces allegations of malpractice & conflict of interest involving the CEO. Media reports suggest a preliminary inquiry has been filed; overhang to continue until a speedy investigation & closure is reached. We change estimates to factor in new RBI guidelines on stressed assets and lower PT to Rs 370. Buy

The allegation: In a nutshell, media articles allege malpractice or nexus between ICICI Bank’s loan approval to Videocon Industries and linkage to companies promoted by the husband/relatives of the CEO of ICICI Bank. The loan amount in question is about Rs 32.5 bn.

The board speaks: The bank’s board has put a protective cordon around the CEO absolving her of any quid pro quo/nepotism/conflict of interest. It has further commended the entire management team for “their hard work and dedication”. Such words effectively rule out the possibility of appointing external investigators for further examination, if at all. We wonder that if the CBI goes ahead with corruption investigation by filing a First Info. Report (FIR), will the board ask the CEO/key mgmt personnel to step down?

What’s the downside? The Videocon exposure is classified as NPA and will be admitted under insolvency proceedings — impact is to the extent of haircut & is priced in. Emerging risks could be (i) a formalised corruption charge and more such instances coming up, and (ii) bank facing a ‘class action’ suit (ADRs are 24% of total shares) and a costly settlement. While further investigations do not preclude risks of business slowdown, the second line of management is capable of steering the ship (growth is mainly in retail segment, which is process driven not requiring large mgmt. intervention).

Upside scenarios: We present various scenarios of haircut assumptions on stress exposure, BV multiple of retail & corporate business & holding company discount — barring extreme conditions, the downside to the stock seems fairly limited.

Change in estimates: We cut estimates for FY18/19/20e by 24/11/1% factoring in RBI’s guidelines of stressed assets with cumulative FY18-20e NPL formation increasing by Rs 85 bn excluding assets under various RBI schemes and associated NIM pressure (marginal).

Valuation/Risks

Core banking business trades at 0.95x adj. book ,based on current market price of ICICI Bank, ICICI Lombard (ICICIGI IN, Rs 790, NC) & ICICI Prudential Life (IPRU IN, Rs 396, NC). We value ICICI Bank at Rs 370. We roll forward by a quarter, valuing core bank at 1.6x book, insurance companies at market price, AMC at 6% of AuM and rest at Rs 26 per share & holding company discount of 15%. Downside: higher NPL formation beyond H1FY19, weak earning trajectory.

Scenario analysis reveals limited downside from these levels

The stock has corrected by more than 10% over the past fortnight (25% correction over last two months vs 7% correction of NIFTY), driven by weaker earnings estimates (post RBI regulation of stressed assets) exacerbated only by the recent allegations & conflict of interest involving the CEO. Pending outcome of preliminary investigations, we expect the stock price to remain subdued. However, we do see long term opportunities as the core bank business trades at 0.95x FY19e adjusted book. We present various scenarios of haircut assumptions on stress exposure, BV multiple of retail & corporate business & holding company discount — barring extreme conditions, the downside to the stock seems fairly limited. Please note that adjusted for the haircut, we value the core corporate business at 1.0x. We have tried to recreate a break-up valuation of the retail and corporate business separately assuming (i) haircut of the stressed corporate book, (ii) separate equity value multipliers for the retail and corporate segments, and (iii) a holding company discount. In the sample calculation, we estimate the value of core banking business at Rs 302 assuming 80% haircut on corporate stressed assets, 2x multiple on retail and 1x multiple on corporate business and a 15% holding company discount.

 

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