Performance Highlights

- Subdued Core income; slightly below expectations: The Bank’s Balance Sheet contraction continued, with advances declining by 9% and deposits by 4%, sequentially. Moreover, the Bank’s NIMs declined sequentially by 20bp, which the management explained was partly on account of low-yielding priority sector loans contracted towards the end of 4QFY2009, and partly on account of investments in low-yielding assets during 1QFY2010. Consequently, the Bank’s Net Interest Income came in below expectations, showing a decline of 5% yoy. However, growth in CASA balances was 2% qoq, resulting in the CASA ratio improving to 30.4%. On the other income front, though core Fee income was inevitably lower on a yoy basis, declining 35% due to a minimal fresh loan growth, lower dividends, 3rd party income, etc., sequentially it was flattish. Net profit growth was primarily underpinned by substantial treasury gains of Rs714cr during the quarter, further accentuating substantial treasury losses of Rs594cr during 1QFY2009.

- Asset-quality pressures remain high: ICICI’s slippages remained high, although substantial write-offs and sale of bad loans to ARCIL helped bring down Gross NPAs, in absolute terms, by 2%, sequentially. The increase in Gross and Net NPA ratios, sequentially, from 4.3% and 2.1%, to 4.6% and 2.3%, respectively, was mainly on account of the sharp de-growth in advances. The Bank restructured a further Rs1,450cr of Advances during 1QFY2010, although the upgradation of loans restructured earlier of Rs3,238cr helped bring down cumulative restructured loans to Rs4,146cr, aggregating to a manageable 2.1% of Advances and 8.3% of the Net Worth.

- Focus on cost control continues: The bank continued with its focus on cost control, with staff expenses flattish, and other opex falling by as much as 10%, sequentially, even though the bank opened 33 more branches. The management enunciated plans to open 580 branches during the quarter, without any increase in overall operating expenses, due to further cost reductions in other divisions such as collections.

- Net Profit grows 21%: ICICI reported a growth in Net Profits of 21% yoy to Rs878cr, higher than expectations, on account of large treasury gains, though the Core income was slightly below expectations.

Outlook and Valuation

At the CMP, the Bank’s Core Banking business (after adjusting Rs220 per share towards the value of the subsidiaries) is trading at 1.6x FY2010E ABV of Rs334. Including subsidiaries, the stock is trading at 1.7x FY2010E ABV of Rs456.5.

We have a positive view on ICICI Bank, given its market-leading businesses across the financial services spectrum. Moreover, we believe that the Bank is decisively executing a credible strategy of consolidation that should result in an improved deposit and loan mix, and, consequently, in improved operating metrics over the medium term.

The strategy involves maintaining strong capital adequacy in the current environment, while building the necessary base for strong CASA mobilization, going forward. This is to be achieved through a substantial branch expansion, without diluting the current focus on stringent cost-control measures. The management has indicated that cost rationalisation is still in process to further bring down the operating expenses. We believe that, on account of this, the bank will be well-positioned by FY2010E to capitalise on the imminent revival in overall GDP growth, resulting in a materially improved balance sheet and earnings over the next two years. ICICI had a total of 955 branches at the end of 3QFY2008, and has added more than 500 branches since then, with an additional 580 additions planned in FY2010E. The Bank’s Capital Adequacy is also amongst the highest at 17.4%, with a substantial 13.1% Tier 1 capital. We believe that the Bank’s substantial branch expansion and large Capital Adequacy, especially on Tier 1, are a precursor to market share gains that will contribute to a substantial Core business growth, though with a lag effect until the macro-environment starts improving again (hence, potentially in 12-18 months).

Meanwhile, ICICI has largely exited all of its businesses outside its core competency, including small-ticket personal loans in the Domestic Segment and most non-India related exposures in its International business (80% business of overseas subsidiaries, and 90% in case of overseas branches is India-related), focusing again on replacing wholesale funds with retail deposits in the international subsidiaries as well. In the short term, while the Asset-quality deterioration is likely to start plateauing only after a few quarters, the increased focus on Treasury as a profit-centre, as well as the continued focus on cost controls should provide some support to the Bank’s P/L account. We maintain a Buy on the stock, with a Target Price of Rs888, implying an upside of 17%.