ABN AMRO has recommended buy rating on ICICI Bank with target price of Rs 931.90. In the past six months, ICICI Bank has underperformed its peers due to a mix of equity dilution overhang, rise in NPLs and recent concerns on credit derivatives. Research firm sees the price correction as an
opportunity, and hence upgrade the stock to Buy.

ABN AMRO report on ICICI Bank:

Stock down 13% since early July; upgrading to Buy

The share price has fallen 13% since early July (vs 4.8% for the Nifty) evidently due to a combination of factors such as equity dilution overhang, increase in NPLs and recent concerns on credit derivatives. We see the recent share price correction as an opportunity to enter the stock and upgrade our recommendation to Buy.

Concerns on credit derivatives seem overdone

ICICI Bank has an exposure of Rs 59 billion in credit derivatives (as at March 2007). Of this, about 70% is linked to Indian corporate transactions and the rest is international exposure. According to management, the underlying asset quality remains comfortable and an economic loss is unlikely. However, the bank will have to book a notional mark-to-market loss due to widening credit spreads. In the bank’s international subsidiaries, the derivatives exposure is below Rs 20 billion but no exposure to US subprime segments, according to management.

ICICI Financial Services . valuing the exit price for an investor

According to Press Trust of India, ICICI Bank received the Foreign Investment Promotion Board’s approval to dilute up to 24% of its stake in ICICI Financial Services. In June 2007, ahead of the equity dilution, ICICI Bank received bids for 5.9% of ICICI Financial Services for Rs 26.5 billion, thus valuing the company at Rs 446 billion. This comprises the value of ICICI Bank’s 51% stake in the mutual fund and 74% stake in life-insurance and non-life insurance ventures. According to our calculations (post-tax and holding company discount), the per-share value of ICICI Financial Services is about Rs 305. We value the same at Rs 222 per share in our sum-of-the-parts valuation. However, if management is able to place a further stake in ICICI Financial Services for similar/higher valuations, then we believe the value per share of the subsidiary for a shareholder of ICICI Bank will be higher than our estimates.

Buy; target price unchanged at Rs 931.90

We estimate ICICI Bank’s core average ROE at about 11% for the next three years (excluding dividend income, investment in subsidiaries and profits of international subsidiaries). Excluding the value of subsidiaries, the stock trades at 10.2x FY09F earnings and 1.1x adjusted book value FY09F. We find this attractive. We upgrade to Buy but maintain our Rs 931.90 target price.