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May 6, 2009 ICICI Bank (ICBK.BO)Goldman Sachs Global Investment Research 1
 
May 6, 2009
ACTION
Removed from Asia Pacific Conviction Buy ListICICI Bank (ICBK.BO)
Off Conviction list, but maintain Buy on still resilient prospects
What happened
We remove ICICI bank (ICICIB) from our Asia Pacific Conviction Buy list asthe stock has breached our previous target price. ICICIB’s share price hasrisen by 22% since we added it to the Conviction Buy list on April 27, 2009vs. a +7% move by the BSE index. Over last 12m, ICICIB fell by 39% vs.31% decline for BSE. We reiterate our Buy due to: 1) improving earningsgrowth prospect; 2) reduced concerns about risk profile of assets; and 3) amean reversion in its multiples as a result of the strengtheningfundamentals. We raise our 12-m TP by 11% to Rs590 on upside to near-term as well as long-term growth expectations.
GrowthReturns *MultipleVolatilityVolatilityMultipleReturns *Growth
Investment Profile
LowHigh
Percentile20th40th60th80th100th* Returns = Return on CapitalFor a complete description of theinvestment profile measures please refer tothe disclosure section of this document.ICICI Bank (ICBK.BO)Asia Pacific Banks Peer Group Average
Current view
Our constructive view on ICICIB is based on: 1) reduced stress on fundingposition from lower wholesale costs domestically and globally; 2)improving visibility on growth returning back to sustainable levels by2010E; 3) cost reduction measures that would likely put the bank in anadvantageous position when growth returns back to sustainable levels; 4)continued focus on profitability; and 5) a moderate valuation (1.2X 09E P/Bvs historic median of 1.6X) despite the run-up in share price since March2009 lows. While the ROE would likely remain low through 2011E, risingROA together with increase in leverage brightens the prospect of ROEreturning back to historic mean of over 16% in the long-term. We believethis would likely remain as a catalyst for the mean reversion of valuationtowards historic P/B median levels of 1.6X. We raise our 2009E/2010E EPSby 7%/5% on higher NIM, lower operating costs and progressivelydeclining credit costs. We also introduce 2011 estimates.Our 12-m TP of Rs590 is derived using SOTP methodology. We value thebanking business at the mid-point of GS CAMELOT-derived P/B multiplesand ex-growth value. We value the strategic investments of ICICIB usingmultiple methodologies.
Risks:
a) significant deterioration in the asset quality of wholesale bankingsegment; b) any additional recap needs for the international subsidiariesleading to BVPS erosion; and c) execution risks in consumer banking.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View:
Neutral
India:Banks
Key data Current
Price (Rs)569.4512 month price target (Rs)590.00Market cap (Rs mn / US$ mn)604,006.5 / 12,101.9Foreign ownership (%)65.6
3/09 3/10E 3/11E 3/12EEPS (Rs) New 33.34 36.66 44.39 55.88
EPS revision (%)4.37.05.5--P/B (X)1.31.21.11.1P/E (X)17.115.512.810.2Dividend yield (%)1.92.12.53.2P/PPOP (X)6.76.55.54.6PPOP growth (%)12.74.016.720.9Preprovision ROA (%)2.32.42.52.6Credit cost (%)1.71.51.41.4ROA (%)0.971.051.151.23ROE (%)7.88.19.210.8
Price performance chart
2003004005006007008009001,000May-08 Aug-08 Nov-08 Feb-098,00010,00012,00014,00016,00018,00020,00022,00024,000ICICI Bank (L) India BSE30 Sensex (R)
Share price performance (%)3 month6 month12 month
Absolute45.726.1(39.0)Rel. to India BSE30 Sensex9.25.2(12.0)
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 5/05/2009 close.
Sampath S.K. Kumar
+91(22)6616-9044 | sampath.sk.kumar@gs.com Goldman Sachs India SPL
Roy Ramos
+852-2978-0457 | roy.ramos@gs.com Goldman Sachs (Asia) L.L.C.
Ashish Naik
+91(22)6616-9049 | ashish.naik@gs.com Goldman Sachs India SPL
The Goldman Sachs Group, Inc. does and seeks to do business withcompanies covered in its research reports. As a result, investors shouldbe aware that the firm may have a conflict of interest that could affectthe objectivity of this report. Investors should consider this report asonly a single factor in making their investment decision. Customers inthe US can receive independent, third-party research on companiescovered in this report, at no cost to them, where such research isavailable. Customers can access this independent research atwww.independentresearch.gs.com or call 1-866-727-7000. For Reg ACcertification, see the end of the text. Other important disclosures followthe Reg AC certification, or go to www.gs.com/research/hedge.html.Analysts employed by non-US affiliates are not registered/qualified asresearch analysts with FINRA in the U.S.
 
The Goldman Sachs Group, Inc. Global Investment Research
 
May 6, 2009 ICICI Bank (ICBK.BO)Goldman Sachs Global Investment Research 2
ICICI Bank: Summary financials
Profit model (Rs mn) 3/09 3/10E 3/11E 3/12E Balance sheet (Rs mn) 3/09 3/10E 3/11E 3/12E
Net interest income83,762.492,659.9108,983.3129,159.8Gross loans2,234,007.62,402,787.42,745,177.83,264,171.8Non-interest income76,180.274,292.384,410.099,530.6NPLs96,859.4110,939.6137,995.0161,879.9Operating revenue159,942.6166,952.2193,393.2228,690.4Loan loss reserves65,690.571,787.687,793.3111,179.7Non-interest expense(70,238.6)(73,676.0)(84,519.7)(97,041.7)
Total interest earning assets 3,406,884.4 3,700,408.3 4,241,494.7 5,114,295.7
Preprovision operating profit89,704.093,276.2108,873.5131,648.8Other non-interest earning assets386,507.7386,164.6417,198.3489,160.3Total provision charge(38,033.0)(36,607.9)(39,303.0)(44,085.7)
Total assets 3,793,392.1 4,086,572.9 4,658,693.1 5,603,456.0
Associates0.00.00.00.0Customer deposits2,183,355.22,606,409.23,065,228.63,720,108.6Pretax profit51,671.056,668.369,570.687,563.1Total interest-bearing liabilities3,104,512.13,341,999.33,852,156.84,686,310.3Tax(14,054.5)(15,300.4)(19,479.8)(24,517.7)
Total equity 495,329.4 525,688.7 561,415.1 605,391.0
Minorities0.00.00.00.0
Net profit 37,616.5 41,367.8 50,090.8 63,045.4 CAMEL ratios (%) 3/09 3/10E 3/11E 3/12E
C: Tier 1 capital ratio12.412.111.210.1Dividends12,246.113,419.316,287.520,309.0C: Equity/loans22.722.421.019.1Dividends payout (%)32.532.432.432.1C: Equity/assets13.112.912.110.8A: NPL ratio4.34.65.05.0
Earnings growth drivers (%) 3/09 3/10E 3/11E 3/12E
A: Loan loss reserves/NPLs67.864.763.668.7Net interest margin2.342.412.492.48E: Net interest margin2.342.412.492.48Provision charge/total loans1.741.561.471.39E: Non int inc/oper revenues47.6344.5043.6543.52
YoY Growth (%)
E: Cost-income ratio43.944.143.742.4Customer deposits(10.7)19.417.621.4E: ROAA0.971.051.151.23Loans(3.2)7.513.918.6L: Loan/deposit ratio100.090.087.285.2Net interest income14.710.617.618.5Fee income14.0(5.0)15.020.0
Key CAMELOT assumptions 3/09 3/10E 3/11E 3/12E
Non-interest income(13.5)(2.5)13.617.9GS CAMELOT implied P/B (X)1.2------Operating revenue(0.7)4.415.818.3GS CAMELOT implied P/E (X)7.2------Operating expenses13.9(4.9)(14.7)(14.8)Risk-free rate (%)8.18.18.18.1
Preprovision operating profit 12.7 4.0 16.7 20.9
Equity risk premium (%)6.06.06.06.0Provision charges49.6(3.8)7.311.6CAMELOT beta (X)1.0------Pretax profit2.29.722.825.9Risk-adjusted cost of equity (%)14.1------Net profit(9.5)10.021.125.93-yr adjusted DPS CAGR (%)18.1------EPS(14.8)10.021.125.9Sustainable ROE estimate (%)17.0------DPS10.09.120.824.1LT dividend payout estimate (%)73.0------Ex-growth bond-equivalent P/B (X)1.2------
Market dimensions 3/09 3/10E 3/11E 3/12E
No of branches0.00.00.00.0
Loan portfolio (%) 3/09 3/10E 3/11E 3/12E
No of staff (000)0.00.00.00.0Commercial & corporate52.551.450.650.2Revenues/staff (US$)NMNMNMNMMortgages/home loans25.725.125.525.8Net profit/staff (US$)NMNMNMNMConsumer47.548.649.449.8
Valuation (current price) 3/09 3/10E 3/11E 3/12EDuPont analysis (%) 3/09 3/10E 3/11E 3/12E
P/E basic (X)17.115.512.810.2
ROE 7.8 8.1 9.2 10.8
P/B (X)1.281.211.141.06x leverage12.313.012.411.4P/PPOP (X)6.76.55.54.6
=ROA 0.97 1.05 1.15 1.23
Dividend yield (%)1.92.12.53.2
% of assets 3/09 3/10E 3/11E 3/12E
EPS, basic (Rs)33.8037.0844.6956.00Net interest income2.152.352.492.52EPS, fully-diluted (Rs)33.3436.6644.3955.88Fee income1.641.541.601.63Non-interest income1.961.891.931.94EPS, basic growth (%)(14.2)9.720.525.3Operating revenue4.114.244.424.46EPS, fully diluted growth (%)(14.8)10.021.125.9Operating expenses1.801.871.931.89Preprovision operating profit2.302.372.492.57BVPS (Rs)444.93470.09499.80536.56Loan loss provisions0.980.930.900.85DPS (Rs)11.0012.0014.5018.00Pretax profits1.331.441.591.71Taxes0.360.390.450.48
Note: Last actual year may include reported and estimated data.
Source: Company data, Goldman Sachs Research estimates.
Analyst ContributorsSampath S.K. Kumar
sampath.sk.kumar@gs.com
Roy Ramos
roy.ramos@gs.com
Ashish Naik
ashish.naik@gs.com
 
May 6, 2009 ICICI Bank (ICBK.BO)Goldman Sachs Global Investment Research 3
We stay constructive on ICICIB due to strengthening fundamentals
Exhibit 1:
 
Risk-reward favorable given that current valuation is well below historicmedian of 1.6X; near-term upside likely from improving fundamentals and visibility ofgrowth returning to sustainable path
ICICIB and coverage group —1-year forward PB
 
0.000.501.001.502.002.503.003.504.004.505.00
     S    e    p  -     9     7     M    a    r  -     9     8     S    e    p  -     9     8     M    a    r  -     9     9     S    e    p  -     9     9     M    a    r  -     0     0     S    e    p  -     0     0     M    a    r  -     0     1     S    e    p  -     0     1     M    a    r  -     0     2     S    e    p  -     0     2     M    a    r  -     0     3     S    e    p  -     0     3     M    a    r  -     0     4     S    e    p  -     0     4     M    a    r  -     0     5     S    e    p  -     0     5     M    a    r  -     0     6     S    e    p  -     0     6     M    a    r  -     0     7     S    e    p  -     0     7     M    a    r  -     0     8     S    e    p  -     0     8     M    a    r  -     0     9
1 yr fwd ICICIB PB1 yr fwd coverage PBMedian PB(X)
 
Source: Datastream, Company data, Goldman Sachs Research estimates.
Exhibit 2:
 
We are reflecting the prospect of mean reversion in ROE in our valuations as well. We raise our long-termROE forecast for ICICIB to 15% for stage 2 of Camelot model (revised up from 14.5%) and 17% for the terminal growthphase (revised up from 16%)
GS Camelot based 3-stage DDM for coverage stocks
 
12-mostage 1PricetargetPotentialCAMELOT(a)3-year15-year(b)(c) = (b)/(a)Reuters5-May-09priceupside/implied P/B xTotal discdivgrowthDivSustL/TEx-growthTickerRatingRsRs(downside)2009E BVPS (Rs)rateCAGRratepayoutROEgrowthP/BP/EP/BICICIBICBK.BOBuy5695903.6%61015.0%18.1%11.6%22.5%17.0%4.6%1.227.21.131.26 
AxisAXBK.BOBuy6286808.3%93013.8%36.0%12.2%36.0%19.0%4.8%2.9115.31.382.04  HDFCHDFC.BOBuy1,8591,820-2.1%2,30013.2%18.6%12.6%51.5%23.0%4.8%3.8216.61.743.45  HDFCBHDBK.BONeutral1,189880-26.0%1,13813.5%21.0%12.2%39.0%20.0%4.8%2.7013.51.482.09  SBISBI.BONeutral1,3441,150-14.4%1,06016.2%10.2%11.2%25.5%15.0%4.6%0.785.20.930.94  IOBIOBK.BONeutral64709.4%5016.8%-7.0%11.2%20.0%14.0%4.6%0.423.00.830.59  IBFSLIBUL.BONeutral120100-16.4%8016.8%-6.0%12.0%25.0%14.0%4.6%0.523.70.830.69  IDFCIDFC.BOSell9150-45.3%5015.6%1.0%12.0%25.0%18.0%4.6%0.955.31.150.95  KMBKTKM.BOSell455250-45.0%24015.0%1.0%12.2%24.0%16.0%4.8%0.925.71.071.22  PNBPNBK.BOSell504340-32.6%29016.2%2.2%11.2%25.5%15.0%4.6%0.684.50.930.74  BOBBOB.BOSell322230-28.5%16016.2%0.0%11.2%14.0%14.0%4.6%0.463.30.860.61 
Implied2009ETangibleP/B fortargetpriceGS CAMELOT valuation modelCAMELOTImpliedmultiples (X)Ex-growthbond eqmultiple (x)GS CAMELOTimplied valuestage 2stage 33-stage dividend discount modelCapital assetpricing model
 
For important disclosures, please go to http://www.gs.com/research/hedge.html. For methodology and risks associated with our price targets, please see ourpreviously published research.
Source: Company data, Datastream, Goldman Sachs Research estimates.
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