Company Review: ICICI Bank

Company Review: ICICI Bank

ICICI Bank’s Q2FY09 results showed the impact of the economic slowdown and high interest rates. Advances rose modestly by 7.2% y-o-y, while the net profit remained virtually flat at Rs10.1 billion.

We believe that advances will grow at a moderate pace of 9.2% for the next three years, as against 36.4% in the previous three years, as the Bank is tightening its lending norms and going slow on retail lending to improve its asset quality.

Also, the recent increase in the home loan lending rate is also likely to discourage mortgage demand. In addition, a sizeable international loan portfolio (26% of consolidated advances) may also hurt growth.

We do not expect any improvement in ICICI’s consistently deteriorating asset quality in the near term, on account of its large exposure to the real estate market (about 28% of the loan book in Q2’09).

Though the Bank is tightening its lending norms, it would still be exposed to the likelihood of a default on the loans given earlier. Also, the current economic slowdown and high interest rates point towards higher defaults in the upcoming


We expect the net interest margin (NIM) to fall by about 13 bps in FY09. The Bank is reducing its lending to retail segment, where it enjoys a high margin. In addition, the recent rumours about the Bank going bankrupt may deter new deposits, affecting ICICI Bank’s plans to garner more low-cost deposits.


For ICICI Bank, our target price of Rs563 for FY09E is based on the sum-of-the-parts valuation methodology.

We have arrived at a per-share value of Rs380 for the standalone business, based on the three-stage discounted equity cash flow method and have assumed a 16.51% cost of equity and a terminal growth rate of 6.42% for the same.

ICICI Prudential Life has been valued at a target NBP multiple of 13x. This gives the life insurance business a valuation of Rs95. The AMC has been valued at 7% of its AUM, leading to a valuation of Rs23. We have valued ICICI Securities at Rs24, based on a target P/E multiple of 7x. Other businesses, taken together, have been valued at Rs41.