Fresh investments with a two-three year horizon can be considered in the stock of ICICI Bank that trades at an attractive valuation.

At the current price of Rs 829, excluding the value of subsidiaries (estimated at Rs 240 per share) the stock trades at 1.28 times its estimated 2013 book value. This is at a discount to all new private banks. The price-to-book multiple at the consolidated level is 1.44 times.

ICICI Bank is likely to be impacted less than other banks due to the new Basel III norms which propose stricter capital requirement. ICICI Bank has a tier-1 capital ratio of 12.7 per cent as compared to an average 10 per cent for other banks. Therefore, while other banks may face downward pressure on profitability, ICICI Bank can still improve return ratios.

The bank managed to improve its return on assets from slightly less than one per cent in 2008-09 to 1.5 per cent in 2011-12. There is further scope for return on assets to improve as fee income growth revives and the branch network is more effectively utilised.

Improved proportion of low-cost deposits, reduced wholesale deposits and rising spreads on the international business aided the bank's net interest margins (NIM). NIM expansion coupled with balance-sheet returning to growth, aided profitability. Not only have the core operating metrics of the bank improved (even after Bank of Rajasthan merger), non-performing assets (NPA) during this period were also kept under check. The gross NPA ratio declined from 4.4 per cent in March 2009 to 3.6 per cent in March 2012.

Another key positive for the bank is that the fee income (in spite of some moderation) is large enough to cover most of the operating expenses.

Loan growth drivers

For the year ended FY12, the bank's NIM stood at 2.73 per cent, up from 2.64 per cent a year ago. Management expects 10-15 basis points further increase in NIM, aided by retail loans, CRR cut and fall in wholesale deposit rates.

The loan book of ICICI Bank grew by 17.3 per cent during the year 2011-12, partly aided rupee depreciation on its international book. Even as the bank had planned to revert to higher growth through lending in 2011-12, it has maintained focus on profitability over market share.

Going forward, loans sanctioned but not disbursed, working capital loans and secured retail loans are expected to drive growth. Retail loans currently account for 36 per cent of the total portfolio while domestic corporate and SME segments account for 28.3 per cent.

Thanks to relatively lower exposure to corporate and SME loan book, the net restructured assets, as a proportion of total loan book, was 1.6 per cent as of March 2012. With no major accounts in the process of restructure, stressed assets may not significantly rise over the next few quarters (assuming economic conditions don't deteriorate). Over the year, thanks to proactive provisioning, the bank managed to keep net NPA ratio at a moderate 0.62 per cent of the book.

The bank has a strong network of around 2,752 branches which has allowed it to reduce dependence on wholesale deposits.

Wholesale deposits accounted for just a quarter of total deposits in the latest quarter, even as low-cost deposits brought in 43.5 per cent. ICICI Bank's retail deposit portfolio is rising as the bank is also able to attract more long-term deposits.

The bank has managed to increase deposits of more than three-year maturity from 4 per cent of total deposits in March 2011 to 25 per cent in March 2012. These longer duration term deposits reduce asset-liability mismatches for the bank.

Subsidiaries

The consolidated profit after tax at Rs 7,645 crore, grew 25.4 per cent for the year ended March 2012. None of the subsidiaries required capital during the previous fiscal and, barring general insurance business, all other subsidiaries were profitable.

International subsidiaries are focused on India-centric business which reduces the risk of Euro Zone issues spilling over to its subsidiaries.

Secondly, assets and liabilities on international book are evenly matched. However, it is noteworthy that yields on ICICI Bank's credit default swaps have once again risen over the last three months. Therefore, any incremental borrowing may have to come at higher cost.

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