Recommendation: SELL
Sector: Banking
Home Country: India
Listed On: Bombay Stock Exchange, National Stock Exchange
Data provided are consoludated US GAAP numbers for the ADS in US$ if not indicated otherwise.
Assets FY 2005 (March 31st, 2005): 42.7 bln US$
Net Income FY 2005: 196 mln US$
Debt/Equity ratio end of FY 2005: 13.72
Share Price May 19th, 2006: 27.28 US$
Earnings per Share (ADS) FY 2005: 0.54 US$
Expected Earnings per share FY:
2006: 0.68
2007: 0.82
2008: 0.98
2009: 1.18
Price/Earnings Ratio FY 2007: 33.41
Expected Price/Earnings Ratio: (for actual share price with expected FY EPS)
2008: 27.84
2009: 23.20
Market Capitalisation: 10.0 bln US$
Target P/E Ratio FY 2009: 18
Target Share Price 2008: 21.16 US$
(decrease of 22.42% compared to actual share price)
Currency conversion: 1 US$= Rs. 44.6226
Company Profile
ICICI Bank Limited provides banking products and financial services to corporate and retail customers primarily in India. Set up in 1994 and reverse merged with parent company ICICI in FY02, ICICI Bank, the second largest banking entity in the country, is a 'universal bank'. The core strengths of strong retail franchise and diversified business areas (operated through its subsidiaries) have anchored the bank's growth in the highly competitive private banking sector. The bank finances approximately 35% of the country's retail credit requirement and is the market leader in car loan business (38% market share) (Source: ICICI Bank). 51% of the bank's retail portfolio is garnered through mortgage financing followed by auto loans (20%) and commercial business (12%).
Analysis
ICICI Bank continues its profitable growth in the first nine month of fiscal year 2006.
Retail assets increased 70% to Rs. 78,495 crore (US$ 17.4 billion) at December 31, 2005 from Rs. 46,194 crore (US$ 10.3 billion) at December 31, 2004. The Bank has the largest retail asset portfolio among Indian banks and finance companies.
Deposits increased 63% to Rs. 133,881 crore (US$ 29.7 billion) at December 31, 2005 from Rs. 81,928 crore (US$ 18.2 billion) at December 31, 2004.
At December 31, 2005, the Bank’s net non-performing assets constituted 0.80% of customer assets against 2.29% at December 31, 2004.
Profit after tax increased 26% to Rs. 1,750 crore (US$ 388 million) for the nine months ended December 31, 2005 (9M-2006) from Rs. 1,391 crore (US$ 309 million) for the nine months ended December 31, 2004 (9M-2005).
ICICI Bank continued to build on its existing presence in various geographies as well as enter new markets. In addition to providing credit and trade finance solutions to Indian companies, the Bank is expanding its international retail franchise through technology-based banking services. Since October 2005, the Bank has opened branches in Hong Kong, Dubai and Sri Lanka.
ICICI Prudential Life Insurance Company (ICICI Prudential Life) continued to maintain its market leadership among private sector life insurance companies. While the growing operations of ICICI Prudential Life had a negative impact of Rs. 49 crore (US$ 11 million) on the Bank’s consolidated profit after tax in Q3-2006 on account of business set-up and customer acquisition costs, the company’s unaudited New Business Achieved Profit (NBAP) for Q3-2006 was Rs. 142 crore (US$ 32 million).
Prudential ICICI Asset Management Company was the largest private sector mutual fund in India at December 31, 2005 with assets under management of over Rs. 22,000 crore (US$ 4.9 billion).
Valuation
Based on the argumentation above we estimate that ICICI Bank will grow its net profit and EPS by 26% for the FY 2006 compared to the prior year. For the three following years we estimate a growth rate of 20% for net profit and EPS. In our opinion banks are subject to the credit cycle of phases with a strong expansion of credit are followed by a phase of slower credit growth or even credit contraction. Therefore we do not believe that the bank will be able to grow its assets with a rate of 70% or more over the whole cycle. If banks are growing too fast they are also more likely to face asset quality problems in the future. We do recognise however that ICICI Bank has been able to decrease its net non-performing assets from 2.29% of customer assets to 0.80% by December 2005. Therefore we believe that our growth rate of 20% for EPS is realistic and sustainable.
Our estimate for the P/E ratio of 18 is ambitious for a bank, as banks in industrialised countries are usually valued at multiples of 10-15. However the high multiple of 18 takes into account the excellent growth prospects of ICICI Bank. With our estimates for EPS and the P/E ratio we arrive at our target price of 21.16 US$ for the year 2008. As this is below the actual share price we put a SELL recommendation on the stock. There is no doubt about the excellent growth opportunities for ICICI Bank, but the valuation is already very ambitious and we would only recommend the stock if it falls below our target price during a correction phase at the Indian stock market.