ICICI Bank – Positive Surprise + Transition Continues

ICICI Bank‘s profits for Q2FY10 grew 3% YoY and 18% QoQ driven by 18% fall in operating expenses. Net revenues (adjusting for trading gains) declined 15% YoY due to 5% decline in NII as loan book shrunk 13% YoY in Q2. Fee income continued to decline YoY (26% in Q2). Demand deposits grew 9% YoY and 14% QoQ.

ROA set to increase to 1.3% by FY11e, led by improving margins. Core RoE of the bank could rise to ~17% by FY12 v/s 11% Higher retail NPL ratios may continue for some time. NPL’s are high (and so is deterioration), coverage modest (New RBI regulations suggest lumpy provisioning ahead); c) International book: over 25% of loans, low on profitability (50bps margin), with risks harder to manage – in our view this expanded exposure adds little value.

This year management has been articulating its 4C strategy (CASA, cost, credit and capital) and appears to be delivering on that. CASA deposits went up, costs were down, credit problems seem to have peaked, and the capital base remains extremely strong.

EPS Estimates of ICICI Bank @ end of Q2:
Citi – 46.11 and 62.97 for fy10 and fy11 with sum of the parts valuation at 832
HSBC – 45.66 and 55.29 for fy10 and fy11
BOFA-Merrill – 37 and 49 for fy10 and fy11 with sum of the parts valuation at 1050
Morgan Stanley – 36 and 41 for fy10 and fy2011 with SOTP valuation of 765 [base case]
UBS – 38 and 51 for fy2010 and fy2011 with valuation of 900 which includes insurance subsidiaries, Housing Finance and other foreign businesses.