We maintain outperform on ICICI Bank with a target price of R1,175 per share. At 1.5x FY15e BV and 10.3x FY15e earnings, the bank?s valuations are close to historical averages and remain attractive for long-term investors.
ICICI Bank?s core cost/income ratio and opex/average assets are down sharply over FY08-13, making it the lowest cost retail focused private bank. We believe this has led to under-investment in its once marquee retail asset franchise ? seen in lower employees/ branch, average employee and other costs as well as a lower retail lending market share. While there has been a recent step-up in retail franchise spend, it remains well below historical and peer levels; and after prolonged under-investment, a recovery is likely to be gradual. However, the bank has also improved its profitability (RoAA up 50 bps in FY08-13), deposit franchise (40%+ CASA), and asset mix and quality (low credit costs). We believe any further improvement in its operating revenues (NIMs and fees) should now be invested to rebuild its retail asset franchise. We remain positive on ICICI Bank on likely macro easing and reasonable valuations (1.5x FY15e P/BV).
Excessive cost focus leading to shift away from retail. Over FY08-13, ~84% of ICICI Bank?s new loans were to corporate and infrastructure. Retail lending, down to 10-12% of new loans, is below larger peers and distributed from fewer branches than in FY08. In FY13, the bank?s opex was 16% lower than in FY08 versus a 3x rise for peers. Also, per branch non-employee expenses are 75% off the FY07 peak. While the cost focus has eliminated excesses and rebalanced the portfolio, it has also meant underinvestment in the retail franchise and should reflect in a more gradual recovery.
