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Buy ICICI Bank, target price Rs 1,292: Sharekhan

Sharekhan has given a buy recommendation on ICICI Bank for a target price of Rs 1,292.
ICICI Bank’s Q4 results were broadly in line with estimates with net profits growing 44.4% year on year (YoY) to Rs1,452 crore, led by a strong growth in the net interest income (NII) and a decline in non-performing asset (NPA) provisions.

The net interest income grew 23.3% YoY aided by margin expansion (10 basis point quarter on quarter [QoQ] to 2.7%) and a healthy growth in advances (19.4% YoY). The asset quality continues to improve over the past three quarters as gross and net NPAs have declined to 4.47% and 1.11% respectively.

ICICI Bank’s NII grew 23.3% YoY and 8.6% QoQ to Rs2,510 crore, which is in line with estimates. This was driven by a 10 basis point Q-o-Q growth (2.7% compared to 2.6% in Q3FY2011) in margin and a strong growth in advances.

A breakage of deposits (term deposits) during the quarter also aided the growth in margins. Overall advances grew 19.4% YoY and 4.7% QoQ, contributed by agriculture (37% QoQ), small and medium enterprises (SME; 20% QoQ), and the retail segments (6% QoQ).

The overall deposits grew 11.7% YoY while current account-savings account (CASA) deposits grew 21% YoY leading to an expansion in the CASA ratio to 45.1% from 44.2% in Q3FY2011.

For FY2011 the average CASA balances expanded to 39% from 32% in FY2010. The management expects to maintain a CASA ratio of 40% and margins at ~2.7% led by re-pricing of its assets book and expansion in overseas net interest margin (NIM)s.

Due to a loss of Rs196 crore in treasury compared to Rs196 crore of gains in Q4FY2010, the non interest income declined by 13.2% YoY and 6.2% QoQ.

However the fee income expanded at a healthy rate of 18.8% YoY and 10.2% QoQ with an increased contribution from the corporate segments. The management has guided that the fee income going ahead will be in line with the balance sheet growth.

ICICI Bank’s gross and net NPAs declined to 4.47% and 1.11% respectively compared to 4.75% and 1.39% in Q3FY2011. The net additions to NPAs were nil in Q4FY2011. Consequently the provisions declined 17.4% QoQ and contributed to the growth in profits. The provision coverage ratio expanded to 76% from 71% in Q3FY2011.

The cost to income ratio increased to 44.5% from 42.3% in Q3FY2011 and 39% in Q4FY2011 due to increased hiring and bonus payouts. Going forward the management expects to maintain the cost to income ratio at ~42% levels.

The life insurance subsidiary posted a profit of Rs 808 crore for FY2011 compared to a profit of Rs 258 crore in FY2010. The general insurance subsidiary (ICICI Lombard) reported a loss of Rs80 crore in FY2011 due to a Rs 272 crore contribution to motor pool losses in Q4FY2011 as required by the Insurance Regulatory and Development Authority (IRDA).

ICICI Bank’s operating performance continued to improve led by a healthy loan growth and stable margins while concerns on asset quality have eased out. The bank is adequately capitalised (capital adequacy ratio [CAR] – 19.54%) to expand its loans book over the next two years which will lead to an expansion in return on equity (RoE).

“We believe that the margins are likely to sustain at ~2.6-2.7% levels led by re-pricing of the asset book and increase in overseas NIMs. We maintain our earnings estimates for FY2012 and FY2013 and expect earnings to grow at a compound annual growth rate (CAGR) of 21% over FY2011-13. We have rolled over the valuation to FY2013 estimates, valuing the bank at 2.1x FY2013 book value (BV). Therefore our target price is revised upwards to Rs 1,292 (Rs1,040 for the bank and Rs 252 for subsidiaries). We upgrade our recommendation from Hold to Buy,” the brokerage said in a note.

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