Buy ICICI Bank; target of Rs 1050: CLSA

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CLSA Research is bullish on ICICI Bank  and has recommended buy rating on the stock with a target of Rs 1050. 

CLSA Research report on ICICI Bank:

 

Investors should not be overly concerned about ICICI Bank's nonperforming loans. Even after factoring in a threefold rise in loan-loss provisions, net profit should enjoy a compound annual growth rate of 30% over FY07-10CL. We estimate the risk-adjusted ROE of the bank's unsecured loans at about 25%. A direct play on Indian financial services and well poised to capitalise on corporate credit demand, we value the bank at 1.9x FY09CL adjusted book. BUY to our price target of Rs 1,050.

 

Asset-quality concerns overdone

 

Concerns about the bank's rising gross non-performing loans (NPLs) are exaggerated given that most of the increase is due to the bank's higher proportion of unsecured loans, which are priced for higher defaults and have ROE (adjusted for the high risk) of about 25%. We expect NPLs to keep rising and have factored in loan-loss provisions (LLPs) rising to 1.5% in FY10 with the coverage ratio estimated to rise to 100%. Based on our sensitivity analysis, a 100bp higher loss rate on unsecured loans would lead to a 10% decline in earnings and a 150bp drop in ROE.

 

Poised to leverage growth opportunities

 

ICICI Bank, post capital raising, is well positioned to leverage strong domestic credit demand. We expect total loans to enjoy a 30% Cagr over FY07-10CL led by rising corporate and rural credit demand. Retail credit demand is likely to moderate with a slowdown in products such as mortgages and auto loans, but rising unsecured loans should curb the impact.

 

Direct play on Indian financial services

 

ICICI Bank is a direct play on the fast-growing Indian economy due to its dominance in all financial-services segments. It is the largest retail bank in India and is a key beneficiary of rising demand for project financing. It is also the largest private-sector insurance player and a leader in areas of asset management, broking and private equity.

 

Attractive valuations

 

We value the bank at 1.9x FY09CL adjusted book based on its strong earnings growth trajectory and rising ROE. Even after factoring in a threefold rise in LLP, we estimate profit to enjoy a 30% Cagr. Given the uncertainty on regulatory approval for the proposed holding company (IFS), we are not using valuations implied by the possible sale of a stake in IFS. Long-term growth prospects for underlying businesses underpin our valuation of Rs337/share for ICICI Bank's subsidiaries - this is 20% lower than potential IFS investors have indicated they are willing to pay. BUY to our price target of Rs 1050.