We recently met with the management of ICICI bank to get an update on their strategy and future outlook in an uncertain macro environment.
We returned positive to recognize its strategic response to recent macro economic developments.
In our view, stock is likely to be range bound till 4QFY09 results on back of lower earnings growth. Lower earnings expected during Q4FY09 are based on two factors:
a) The bulk of incremental loan growth during this quarter is likely to meet the priority sector obligations, where margins would be lower.
b) The full impact of wholesale deposits raised during 3QFY09 would surface during this quarter. These two factors are likely to impact the margins of the bank.
We expect NIM to get impacted by 15-20 bps during Q4FY09 to 2.20-2.25% (NIM during Q3FY09: 2.4%). We expect this to inch up to 2.4-2.5% by FY10 on back of moderation in loan book growth and re-pricing of wholesale deposits at lower rate.
At the current market price of Rs270, the stock is trading at 7.6x its FY10E earnings and 0.7x its FY10E ABV. We have slightly tweaked our earning estimates and now expect net profit for FY09E and FY10E to be Rs38.82 billion and Rs39.49 billion, respectively.
This will result in an EPS of Rs.34.9 and Rs.35.5 for FY09E and FY10E, respectively. Bank’s adjusted book value for FY09E and FY10E is expected to be at Rs393.9 and Rs412.9, respectively.
On the basis of SOTP, we maintain a BUY rating on the stock with a target price of Rs425 (reduced from Rs.544 earlier on back of lower value for subsidiaries), where the value of its standalone business comes to Rs.310 (P/ABV: 0.75x FY10E ABV, Rs.315 earlier) and the value of subsidiaries included here is Rs.115 (holding company discount of 30% to the fair value of its subsidiaries at Rs.229).