Our analysis of incremental advances – broken into mortgage, non-collateralized retail and corporate loans – vis-à-vis the incremental gross NPL additions indicates that the bank’s strategy of consciously slowing down on growth in riskier categories has started yielding results.
We expect a slowdown in rate of growth of non-collateralized NPLs over the next two quarters, although in absolute terms incremental NPLs will continue in the Rs3-4 billion per quarter range as at present.
In mortgage loans, we expect NPL accretion to slow down although the gross NPL ratio would continue to appear high with the shrinking mortgage book.
The blended incremental gross NPL ratio has remained in the 7% range over the past few quarters.
Our channel checks reveal steady NPL addition over the next two quarters in absolute terms with the gross NPL ratios at 3-4% for mortgage, 4-5% for autos/CVs, 10% for personal loans, 4% for corporate loans and 15% for credit cards. (See Exhibit). Our FY10 EPS of Rs40.72 and book value of Rs474 factor in the above ratios.
Our extreme case scenario analysis of corporate gross NPL of 10% and mortgage gross NPL of 7% yields a FY10E BV of Rs427.
On top of this, writing down the UK investment book (incremental impact of Rs150) – gives a stress case book value per share of Rs277 for FY10. At this extreme case, ICICI Bank currently trades at 1.2x our FY10E BV.
We use a three-stage residual income valuation to arrive at our core bank target price of Rs475 and a sum-of-the-parts approach to arrive at Rs145 per share for the subsidiaries. Our aggregate target price for ICICI Bank is Rs620. At our target price, the core bank trades at 1.0x our FY10E Book value.