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IT’S ALL ABOUT MONEY, HONEY!

AnalystAshutosh Narkar 5675 4478([email protected])

DealingSandeepa Arora 5669 3200Biren Patel 5677 5900

February 2005

ICICI Bank

E(I)nsuring growth

February 01, 2005 2

ICICI Bank : E(I)nsuring growth

Share Price Chart

Recommendation BUYCMP Rs360Target price Rs43152 Week H/L Rs380/211Market Cap Rs265bnBSE Code 532174NSE Code ICICIBANKFace Value Rs10Market lot 1

Shareholding pattern

Share Holders % holdingInstitutional Investors 17.1FII 71.15Other Investors 4.76General Public 6.95

Multiple re-rating triggers prompt us to improve our price target to Rs431, implying apotential upside of 20% along with a dividend yield of 2.4%, taking the total upside to22%.

Retail business in no mood to slow downRetail assets now contribute almost 61% to the bank’s total advances base and weexpect it to improve further. Our estimates factor in a 41.7% CAGR over the periodFY03-07, which should drive ICICI Bank’s retail story.

Fee income improving core profitabilityWith the retail growth still intact and 50% of the fee income coming from retail assets,we have raised our fee income estimates for the bank. The fee income to total assetsexpected to be at 1.1%, is one of the highest in the industry.

Margin expansionStable funding cost and expected improvement in interest income through hike inlending rate is expected to vault ICICI Bank’s margins by almost 40bps over the nexttwo years.

Life insurance business to add to valuationsICICI Prudential Life Insurance is the leader amongst the private sector life insuranceplayers in India, with a market share of 34.2% and commands 6% of whole market(including LIC). We see a significant upside potential of Rs58 per share from thisbusiness towards ICICI Bank’s valuations.

The bank is currently trading at 1.9x and 1.7x its FY06E and FY07E book valuerespectively. The current share price discounts the FY06E and FY07E EPS with amultiple 11.8 and 9.9 respectively. Our target price/book multiple with one year forwardbook value gives us a share price value of Rs373. Its life insurance subsidiary addsanother Rs58, taking the fair price of the company to Rs431 along with a dividendyield of 2.4%, implying a potential upside of 22% from the current levels.

Table: Valuation summary

Source: Company data, India Infoline estimates

Period to FY03 FY04 FY05E FY06E FY07ENet Interest Income (Rs mn) 14,241 18,788 27,927 37,664 46,977Net Profits (Rs mn) 12,062 16,371 18,897 22,487 26,802EPS (Rs) 19.7 26.6 25.7 30.6 36.4ROAA (%) 1.1 1.4 1.4 1.4 1.4ROAE (%) 18.3 21.9 18.5 17.1 18.1Price Earnings ratio (x) 18.3 13.5 14.0 11.8 9.9Price/ Book Value (x) 3.2 2.8 2.1 1.9 1.7Price/ Adjusted Book Value (x) 7.0 4.4 2.5 2.2 1.9

February 01, 2005 3


Q3 FY05 - A quick recap

(Rs mn) Q3 FY05 Q3 FY04 yoy (%) qoq (%)NII 7,330 5,130 42.8 7.0Core Fee Income 5,580 3,050 83.0 3.9Capital Gains 1,990 3,810 (47.8) 61.8Total Income 16,230 13,263 22.4 6.8Core Income 14,240 9,450 50.7 1.9Core Profits 5,713 3,000 90.0 (9.2)PAT 5,177 4,401 17.6 17.1Source: Company data

The bank has been able to sustain net interest income growth at above 40% for thepast three quarters. The big expansion in the NII has been brought through a drop ininterest cost and sustained high securitization income, which formed 25% of the totalinterest income. The bank during the last quarter had mentioned that they wouldcontinue to do so till they derived value from the transaction.

The core profitability has been boosted by strong growth in fee income by 83%.Sustained growth in fee income above 75% over the past three quarters has helpedthe bank reduce the impact of lower capital gains. The core profitability grew by 90%to Rs5.7bn.

The bank transferred securities worth Rs213.4bn and provided for investmentdepreciation of Rs1.8bn. However, the bank had a net provisioning of Rs1bn due tosome NPA write backs. The bank also provided for the NPAs during the quarterfrom the general provision account.

Lower loan loss provisioning reduced the provision coverage for the bank from 69.1%to 68.9%. The gross restructured assets also dropped marginally from Rs68.2bn toRs67.9bn. At the end of December quarter, the bank had a NPA ratio of 2.3%, whilethe retail NPAs stood at 0.6%. Below par asset quality compared to some of itsprivate sector peers has restricted the bank from getting rich valuations.

Business growth remained strong for the bank with advances growing at 32% toRs761bn and is in line with our full year expectation of 26%. Major push for theadvances came from retail assets, growing at 63% to Rs462bn, which formed 60.7%of the total advances portfolio. Deposit accretion was strong at 20% with low costdeposit now accounting for 24% in Q3 FY05 from 21% in Q3 FY04.

February 01, 2005 4


Managing core business growth

Fee income improving core profitabilityHuge growth in fee income has reduced the bank’s impact of lower capital gains inFY05. We expect fee income to drive the bank’s strong core income growth with aCAGR of 40% during the period FY04-07. At 1.1% of total assets, fee incomegrowth for the bank ranks as the best among the Indian banks. Retail assets contributealmost 50% of the fee income. With the retail growth robust, we have raised our feeincome estimates for the bank.

Chart: Fee income trend

Source: Company data

Table: Core operating profit composition

(%) FY03 FY04 FY05E FY06E FY07ENII/ Total Assets 1.3 1.5 1.8 2.1 2.2Fee Income/ Total Assets 0.7 0.9 1.1 1.3 1.4Core income/ Total Assets 2.7 3.0 3.6 4.0 4.2Operating Cost/ Total Assets 1.9 2.1 2.0 2.0 2.1Core Operating Profits/ Total Assets 0.8 0.9 1.6 2.0 2.1Source: Company data, India Infoline estimates

Margin expansionThe huge expansion in net interest income has been through a reduction in fundingcost. Drop in erstwhile ICICI’s borrowings of up to 20% since March 04, and asustained level of low cost deposits of 24% has brought down cost of funds to 5.7%by end of Q3 FY05. The bank still has enough room to bring down its funding costthrough repricing of erstwhile ICICI’s debt, which still account for 18.4% of theinterest bearing liabilities.

Table: ICICI Bank’s funding mix(%) FY04 Q3 FY05Deposits 63.1 66.6ICICI borrowings 26.3 18.4Other borrowings 10.6 15.0Source: Company data

Fee Income t rend

0

1,000

2,000

3,000

4,000

5,000

6,000

Q104 Q204 Q304 Q404 Q105 Q205 Q305

(Rs

mn

)

February 01, 2005 5


We estimate that the bank would replace most of its high cost bowings in the next fivequarters till FY06. This would help keep the cost of funds stable even after hike indeposit rates.

From Q4 FY05, ICICI Bank would revise its earlier announced hike in lending ratefor existing mortgage loan borrowers by 50bps. With interest rates expected to risefurther, we would see a huge margin expansion from FY06 onwards. Bank’ssecuritization drive might reduce the positive impact, as most of the securitized assetsare mortgage loans.

Stable funding cost and expected improvement in interest income through hike inlending rate is expected to vault ICICI Bank’s margins by almost 40bps over the nexttwo years.

Chart: NIM trend


A comparison with its PSU peers shows that it still has enough room for expansion.

Table: Peer group NIM comparisonNIM values for FY04 NIM (%)ICICI Bank (Q3 FY05 at 2.3%) 1.8SBI 3.0PNB 4.0CANARA bank 3.1BOB 3.4Corporation Bank 3.7HDFC Bank 3.9Source: Company data

Net Interest Margin(%)

0

0.5

1

1.5

2

2.5

3

FY03 FY04 FY05E FY06E FY07E

February 01, 2005 6


Retail business in no mood to slow downWe had estimated a 55% share of retail business in our earlier report. However, thenine months figures show retail assets contribution at 61%, which is expected toimprove further. ICICI Bank is a pure play on the Indian retail story and we maintainour bullish stance on this segment due to rising consumerism and growing disposableincomes. Retail assets now contribute almost 61% to the bank’s total advances baseand we expect it to improve further and stabilize at around 68% over the next twoyears. Our estimates factor in a 41.7% CAGR over the period FY03-07 whichshould drive ICICI Bank’s retail story.

Chart: Retail loan growth for ICICI Bank

Retail loans (Rs bn)

0100200300400500600700800900

FY02 FY03 FY04 FY05E FY06E FY07E

CAGR 41.7%


Home and auto loans form the major portion of the retail portfolio. We expect thepersonal loan segment to witness strong growth in the future. Growing use of creditcards in the economy is bound to benefit this segment. Credit card issuance for ICICIBank itself has reached 3mn from a mere 1.1mn in FY03 and 2.2mn in FY04.

Table: Retail loan revenue composition(%) FY03 FY04 Q3 FY05Home loans 47.8 44.7 50.8Auto Loans 23.3 24.5 19.3Commercial 12.9 15.9 11.9Two-Wheeler 4.5 3.2Personal loans & others including credit cards 10.4 14.8

16.2

Source: Company data

February 01, 2005 7


The bank has transformed its balance sheet with an increasing amount of retail fundson the liability side as well. The bank has been reducing erstwhile ICICI’s liabilitieswith other market borrowings. Retail liabilities now constitute almost 67% of the totalinterest bearing liabilities, up from 35.2% in FY02.

Table: Liability mix(%) FY02 FY03 FY04 Q3 FY05Retail 35.2 52.2 63.1 66.6Wholesale 64.8 47.8 36.9 33.4Source: Company data

Life insurance business to add to valuationsICICI Prudential Life Insurance is the leader amongst the private sector life insuranceplayers in India with a market share of 34.2% and commands 6% of the wholemarket (including LIC). The 74:26 joint venture with the UK insurance major Prudentialcurrently has a capital base of Rs8.25bn. We are factoring the bank’s life insurancebusiness in our valuations as we see a significant upside potential from the business.

Chart: Private life insurance market sharePrivate Life insurance market share (%)

0

5

10

15

20

25

30

35

40

ICICI Pru Birla

Sunlife

Tata AIG SBI Life H D F C S t d M a x Kotak Aviva A M P Bajaj

Allianz

Others

Source: IRDA, market share as on November 2004

The insurance business in India is at a nascent stage with most of the insurers in theinvestment phase. The business takes around 5-7 years to break even, as the capitalrequirement increases with increase in business volume. The capital requirement ishigh in endowment and whole life policies and comparatively low in unit linked insuranceplans (ULIPs). The penetration levels in India are abysmally low at 2.3% comparedto 9-15% in developed nations. Since the deregulation of the sector, many private lifeinsurance players have entered the untapped Indian market and PSU behemoth LIChas been rapidly losing its market share, now accounting for almost 79.6%.

ICICI Prudential has been improving its leadership position amongst the private lifeinsurers through a multi product and multi channel approach. The company has beenimproving its investor point mix by increasing its non agency channels which accountfor almost 30%, which include 7 bancassurance partners along with 15 non bankpartners and more than 800 financial sales consultants.

February 01, 2005 8


The company is the first to attack its competitors’ market share with customer centricproducts like retirement solutions and Child Plans. ICICI Prulife is also amongst theleaders in the fast growing ULIP segment.

We have adopted the appraisal value approach, which uses new business achievedprofit (NBAP) as a parameter to estimate the future profits from potential futurebusiness. We arrive at the future profits from future new business, applying a multiplierto the NBAP. The multiplier varies on the basis of various assumptions like businessgrowth stage, kinds of products and distribution strength.

NBAP is the potential profits from new business discounted today. There are variousassumptions like mortality, inflation, discounting rate, lapse potential, etc. affecting theNBAP. ICICI Prulife since the current year has started providing NBAP for itsbusiness. With a high growth region like India having a low insurance penetration, amultiple of 20 seems reasonable.

Table: Life insurance penetration (premium as % of GDP)Region/ Country Market Penetration 2003South Africa 13UK 8.6Switzerland 7.7Taiwan 8.3Japan 8.6US 4.4Industrialized nations 5.2European Union 5.1World 4.6Emerging economies 2.3China 2.3India 2.3Source: Swissre

Table: ICICI prudential Life insurance valuation (Rs mn)Share capital 8,250Reserves (6,581)Shareholder’s funds 1,669NBAP (FY05E) 2,678Embedded value 4,347Future profits from future new business 53,558Appraised value 57,905ICICI Bank’s share 42,850Per share value for ICICI Bank 58.2Source: India Infoline estimates

February 01, 2005 9


Asset quality restricting better valuationsPoor asset quality compared to its peers has kept ICICI Bank from getting bettervaluations on the bourses. The loan loss provisioning for the December quarterdropped, bringing the provision cover marginally lower. The bank still carries theDabhol NPAs on its books, which have seen slight glimmer of hope due to renewedtalks of starting operations. Any major delay in the expected project renewal wouldfurther hamper ICICI Bank’s asset quality. Although, there has not been any significantaddition to impaired assets, the current level is still high compared to some of itsprivate sector peers. We have estimated the FY05 loan loss provisions at 45bps ofthe net advances. Our estimates for FY06 and FY07 factor in a 95bps and 100bpsloan loss provision for the two years respectively.

Investment concerns

February 01, 2005 10


ValuationsHistorically, the bank has been trading at a price to book multiple of 2 times its oneyear forward book value. This is still low compared to some of its private peers. Webelieve this lower valuation is a result of its low asset quality. A price/ book multiple of2 at a cost of equity of 12.5% for the bank implies a growth rate of 7.75% in ourROE-g/COE-g model This is sustainable as the bank is expected to witness strongmargin expansion along with a robust core income growth. Our target price/bookmultiple with one year forward book value gives us a share price value of Rs373. Itslife insurance subsidiary adds another Rs58, taking the fair price of the company toRs431 along with a dividend yield of 2.4% implying a potential upside of 22% fromthe current levels.

Table: Valuation methodologyROAE (%) 17.1COE (%) 12.5Implied growth rate (%) 7.75ROE-g/ COE-g 2.0Fair book value (Rs) 373Subsidiary upside (Rs) 58.2Consolidated fair value (Rs) 431Upside (%) 20Dividend yield (%) 2.4Potential total upside (%) 22Source: India Infoline estimates



Income statement

Balance Sheet

(Rs mn) FY03 FY04 FY05E FY06E FY07ENet Interest Income 14,241 18,788 27,927 37,664 46,977Fee Income 7,918 10,718 17,149 23,151 29,633Forex Income 102 1,926 2,312 2,658 2,977Capital Gains 16,835 12,246 5,058 3,500 3,000Total Other Income 31,588 30,649 32,399 37,442 44,007Total Income 45,829 49,437 60,326 75,106 90,984Operating expenses (20,117) (25,712) (30,664) (36,620) (43,575)Pre Provisioning Profit 25,712 23,725 29,662 38,486 47,409Total Provisions (17,930) (4,726) (5,435) (9,283) (11,673)Profit Before Tax 7,782 18,998 24,227 29,203 35,737Tax 4,280 (2,627) (5,330) (6,717) (8,934)Profit After Tax 12,062 16,371 18,897 22,487 26,802Core Income 28,994 37,191 55,268 71,606 87,984Core Operating Profits 8,877 11,479 24,604 34,986 44,409Effective Tax Rate 55 14 22 23 25

Liabilities (Rs mn) FY03 FY04 FY05E FY06E FY07EEquity Capital 6,127 6,164 7,359 7,359 7,359Reserves & Surplus 63,207 73,942 116,826 131,839 150,337Net Worth 69,333 80,106 124,185 139,198 157,696Preference Capital 3,500 3,500 3,500 3,500 3,500Deposits 481,693 681,086 873,891 1,103,180 1,371,890Borrowings 440,519 398,461 420,168 417,565 430,111Other Liabilities & Provisions 73,074 89,136 105,181 127,338 151,706Total Liabilities 1,068,120 1,252,289 1,526,926 1,790,781 2,114,903Assets (Rs mn) Cash Balances with RBI 48,861 54,080 77,757 85,692 100,807Call money & Balances 16,029 30,627 41,951 44,312 50,611with BanksInvestments 354,623 427,429 481,143 553,947 654,034Advances 532,794 620,955 785,559 950,816 1,142,273Fixed Assets 40,607 40,564 45,527 50,535 53,972Other Assets 75,205 78,635 94,990 105,478 113,207Total Assets 1,068,120 1,252,289 1,526,926 1,790,781 2,114,903





Key Ratios (Figures in %, else mentioned)

FY03 FY04 FY05E FY06E FY07EEarnings Analysis (%) NII/ Total Income 31.1 38.0 46.3 50.1 51.6Fee Income / Total Income 17.3 21.7 28.4 30.8 32.6Fee Income/ Total Assets 0.7 0.9 1.1 1.3 1.4Core Income/ Total Assets 2.7 3.0 3.6 4.0 4.2Core Operating Profits/ Total Assets 0.8 0.9 1.6 2.0 2.1Operational Efficiency Cost/Income 43.9 52.0 50.8 48.8 47.9Cost/Core Income 69.4 69.1 55.5 51.1 49.5Employee Cost/ Total Cost 20.0 21.2 23.5 25.0 26.2Operating Cost/ Total Assets 1.9 2.1 2.0 2.0 2.1Net Interest Margin 1.5 1.8 2.2 2.5 2.6Credit Deposit Ratio 110.6 91.2 89.9 86.2 83.3Incremental Credit Deposit Ratio 38.8 44.2 85.4 72.1 71.3Growth (%) Net Interest Income 140.1 31.9 48.6 34.9 24.7Total Income 292.5 7.9 22.0 24.5 21.1Core Income 230.8 28.3 48.6 29.6 22.9Core Operating Profit 249.5 29.3 114.3 42.2 26.9Pre-Provisioning Profit 371.7 (7.7) 25.0 29.8 23.2Net Profit 370.6 35.7 15.4 19.0 19.2Advances 13.3 16.5 26.5 21.0 20.1Total Deposits 50.1 41.4 28.3 26.2 24.4Total Assets 2.6 17.2 21.9 17.3 18.1Average Earning Assets 66.7 9.2 20.8 19.9 18.6Average Interest Bearing Liabilities 75.8 15.4 18.6 18.6 18.0Asset QualityGross NPAs (Rs mn) 84,140 67,150 62,817 63,408 63,496Loan Loss Reserve (Rs mn) 52,630 46,780 43,401 44,821 47,241Net NPAs (Rs mn) 31,510 20,370 19,416 18,587 16,254Provision Cover 62.6 69.7 69.1 70.7 74.4Share Valuation Ratios ROAA 1.1 1.4 1.4 1.4 1.4ROAE 18.3 21.9 18.5 17.1 18.1BVPS (Rs) 113.2 130.0 168.8 189.2 214.3Adj. BVPS (Rs) 51.4 81.2 142.4 163.9 192.2EPS (Rs) 19.7 26.6 25.7 30.6 36.4DPS (Rs) 7.5 7.5 8.5 9.0 1.0Dividend Payout 43.0 37.5 37.4 33.2 31.0

Published in February 2005. All rights reserved. © India Infoline Ltd 2003-4.This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intendedas an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of theinformation contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIL) and its subsidiaries orits employees or directors, associates will not be liable in any manner for the consequences of such action taken by you.We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do notrepresent that it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any wayresponsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in thispublication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors,employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report.India Infoline Ltd, 24 Nirlon Complex, Off Western Exp. Highway, Goregaon(E). Mumbai -63. Tel 5677 5900. Fax 2685 0451

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