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Structural improvement to get delayed, not derailed
May 24, 2010
The Board of Directors of ICICI Bank and Bank of Rajasthan (BoR) approved the amalgamation of BoR with ICICI Bank.
Accumulate Rs832 Rs986 18.5% 16,470

Rating Price Target Price Implied Upside Sensex
(Prices as on May 24, 2010)

Technology integration – no major impediment: BoR and ICICI Bank operates on the same technology platform ‘Finacle’, which is a positive. However, we believe it will take some time for BoR branches to fully integrate with ICICI Bank. Asset quality to play a wild card: The due diligence and review of 80% of BoR’s loan book done by ICICI Bank showed that the overall asset quality remained satisfactory. Besides, BoR is believed to have no major exposure to promoter group companies. However, in view of lack of information, we are factoring in 10-15% of BoR’s loan book turning bad in the next two years and have accordingly factored in credit costs into our estimates. Outlook – positive in the long run, but in the near term, headwinds persist: Though the deal would yield results in the longer run, in the near term, we believe the improvement in core RoEs for ICICI Bank could get delayed due to higher operating and employee expenses and higher credit costs. Based on our pro-forma numbers for the merged entity, we have reduced ICICI Bank’s earnings by 7.7% and 6.3% for FY11E & FY12E, respectively, as we expect operating costs and provisions to exceed net income contribution by Rs3.5bn and Rs2.5bn at PBT level. We also observe that due to the expected delay in improvement in core RoEs, the re-rating in valuation multiples are also likely to get delayed. Hence, we are downgrading our rating to “Accumulate” valuing the standalone bank at 1.8x FY12E ABV, with a revised price target of Rs986.
Key financials (Rs m) Net interest income Growth (%) Operating profit PAT EPS (Rs) Growth (%) Net DPS (Rs) FY09 83,666 14.5 89,252 37,581 33.8 (9.7) 11.0 FY10E 81,144 (3.0) 97,322 40,250 36.1 6.9 12.5 FY11E 98,040 20.8 102,290 44,283 39.6 9.7 12.5 FY12E 115,156 17.5 123,734 63,141 56.5 42.6 12.5

Trading Data Market Cap. (Rs bn) Shares o/s (m) Free Float Avg. Daily Vol (‘000) Avg. Daily Value (Rs m) 926.1 1,113.1 100.0% 5,597.9 5,149.1

Major Shareholders Promoters Foreign Domestic Inst. Public & Others — 37.02% 25.20% 37.78%

Stock Performance (%) Absolute Relative 1M (14.7) (7.8) 6M (8.1) (4.2) 12M 18.4 (0.2)

Source: Company Data; PL Research

Profitability & valuation Price Performance (RIC: ICBK.BO, BB: ICICIBC IN)
(Rs) 1,050 1,000 950 900 850 800 750 700 650 600

FY09 2.3 7.8 1.0 1.8 1.9 20.9 1.3

FY10E 2.3 7.9 1.1 1.7 1.7 19.3 1.5

FY11E 2.8 8.4 0.9 1.6 1.6 15.5 1.5

FY12E 2.9 11.4 1.3 1.4 1.4 10.8 1.5

NIM (%) * RoAE (%)# RoAA (%) P / BV (x)** P / ABV (x)** PE (x) ** Net dividend yield (%)

Source: Company Data; PL Research *calculated on avg. assets # reported RoEs, core RoE given at the end **Rs55 & Rs64 per share reduced for investment in subsidiaries from Book Value & Rs 172 & Rs198 per share reduced from the CMP for value of subsidiaries for FY11E & FY12E.
May-09 Nov-09 Mar-10 May-10 Jul-09 Sep-09 Jan-10

Source: Bloomberg

Abhijit Majumder +91-22-6632 2236

Umang Shah +91-22-6632 2242

Event Update

Share swap ratio of 1:4.72 – in favour of BoR: ICICI Bank has announced a swap ratio of 25:118, based on which the deal values BoR at 5.3x its FY10E BV, which is at a significant valuation premium considering BoR has reported a net loss of Rs0.1bn during 9MFY10 period, resulting in equity dilution of ~3% for ICICI Bank.

CASA has improved from 27. 40% of the advances are to PSUs and their asset quality remains satisfactory.891 2. already the largest among private players.8 0. How does BoR stack up with ICICI Bank? Particulars No of branches (latest) No of employees Advances (Rs bn) Deposits (Rs bn) Business (Rs bn) CASA (Rs bn) CASA (%) Biz / branch (Rs bn) CASA / branch (Rs bn) Source: Company Data.2 0.000 79 160 239 44.16 41. It would add ~23% to ICICI Bank’s current branch network.7 1.1 ICICI + BOR 2.180 4. Based on the due diligence done by ICICI Bank. Policies and assumptions pertaining to pension and other employee benefits will be re-aligned as per ICICI Bank books.0 0. 2010 2 . this is a positive. BoR operates on technology platform – ’Finacle’.071 887 40. Of 80% of the advances book reviewed by ICICI Bank.812 2.ICICI Bank ICICI Bank’s rationale for amalgamation and key takeaways from the management concall The amalgamation is of strategic importance to ICICI Bank and augurs well for the bank’s strategy of moving towards a branch-centric and customer-centric model. same as ICICI Bank.500 1.4% in March 2009 to 30%+ in March 2010 as the savings bank deposits accretion during the year has been strong for BoR.020 3.463 39.7 2.500 1.5 0. The deal would strengthen ICICI Bank’s presence in the Northern and Western parts of the country.5 BOR latest available 463 4.000 35.8 28. the overall asset quality of BoR remains satisfactory. PL Research ICICI Bank as on Mar’10 2.4 May 24.832 842. There could be some impact on account of employee wage hike.

there are ample opportunities to improve operating efficiencies of BoR branches to scale it up to ICICI Bank levels.712 39. PL Research FY08 46.510 38.561 14.9% 8.3% FY11E 55.239 419 225 4.7% -150 20% 16 11 66 16.9% 10. BoR is extremely small for ICICI Bank.349 523 336 5. we believe that the expected improvement in the core RoE could get delayed by 12-18 months as in the near term.8% 7. However. with its business constituting just ~6% as compared to ICICI Bank and balance sheet constituting ~5% of ICICI Bank’s balance sheet. In the worst case scenario.9% FY09 49. employees. going forward.4% -100 15% 12 8 66 12.330 11.202 7.9% -200 May 24.212 42. 2010 3 . technology issues.6% 13.820 8. with amalgamation of Bank of Rajasthan.2% FY12E 60. the bank may face headwinds in terms of integration of branches. assuming 20% of BoR loans (Rs78bn total outstanding loans as on March 2009) going bad.3% However.451 13.310 922 906 2.ICICI Bank In terms of size.5% FY10E 52. Expected improvement in core RoE’s (pre amalgamation) Particulars Net worth Investments in Subsidiaries Adjusted Net worth Less: dividend income – subsidiaries (assumed 80%) Less: treasury income (assumed 50%) Adjusted profit Current RoAE Adjusted RoAE – excluding dividends & one time treasury Source: Company Data. and concerns over productivity improvement and higher operating and credit costs pertaining to BoR’s nonperforming loans.281 12.212 46. However.570 335 488 3. PL Research 5% 4 3 66 4. improvement in the CASA ratio and substantial decline in the credit costs.154 8.879 11.6% 7. are we focusing on P&L? We had a positive stance on ICICI Bank as we expected improvement in its core RoE due to balance sheet expansion. it has a large branch network of 463 branches.883 12. which is almost one fourth of ICICI Bank’s current branch network.847 7. Likely impact of higher credit costs on ICICI Bank PBT Portion of loans going bad Amount of loans going bad (Rs bn) Expected prov @ 70% (Rs bn) ICICI Bank FY11E PBT Impact on PBT Bps chg in Core ROE Source: Company Data.171 268 643 2.2% -50 10% 8 6 66 8.712 37. However. it could reduce ICICI Bank’s FY11E PBT by ~17% and its expected core RoE by ~200bps.

5bn). Peer comparison in branch network 3. the only positive for ICICI Bank is that the deal would add 463 branches to ICICI Bank’s network (~23% of ICICI’s current branch network). However.pre amalgamation ICICI Bank .9% 47. PL Research Moreover.1bn v/s ICICI Bank’s Rs0. State-wise CASA ratio and BoR’s branches in those states States Rajasthan Maharashtra Madhya Pradesh Delhi Source: RBI. we believe expanding branch network would not have been an impediment to ICICI Bank’s growth plans.po st amalgamation 1035 1725 2463 2000 Source: Company Data. it also gives ICICI Bank a strong foothold in the high CASA regions like Rajasthan.000 500 0 Axis Bank HDFC Bank ICICI Bank .7% No of branches 294 32 22 20 May 24. but in near term headwinds persist: In our view. On the contrary. The current acquisition would further enhance ICICI Bank’s branch network.1% 32. PL Research CASA (%) 47. the efficiency of some of the ICICI Bank branches based in semi-urban and rural areas of Rajasthan is lower compared to that of BoR. Company Data. This definitely provides ICICI Bank with ample opportunity to improve BoR’s branch productivity (BoR CASA per branch of Rs0. 2010 4 . which is anyways largest among private players. where BoR has a significant branch network. which could improve as well.000 2.500 1.000 1. given the current regulatory requirement.500 2.ICICI Bank Outlook – positive in medium to long term.1% 28.

4% 100.4% -26.2% Source: PL Research SOTP valuation for ICICI Bank Business Standalone Core Banking ICICI Prudential Life Ins.ICICI Asset Mgt Home finance company Total Source: PL Research *For ICICI Rs55 & Rs64 per share reduced for investment in subsidiaries from Book Value & Rs172 & Rs198 per share reduced from the CMP for value of subsidiary for FY11 and FY12. Basis –FY11E 1.8 x BV Value per share 725 88 9 41 7 14 12 897 % of SOTP 80.040 75.8% 1.8 x ABV* 15 x NBAP 12 x PAT 15 x PAT 8% of AUMs 5% of AUMs 1. We have also applied a 15% holding company discount.9% 1.1% -6.3% for FY11E & FY12E.242 124. respectively.245 99. Revision in our earnings estimates Pre-Amalgamation FY11E Net Interest Income Operating Profit 89.447 Revision FY11E 9. in the near term. ICICI Lombard General Ins.6% 100.156 91. We also observe that due to the expected delay in improvement in core RoEs.385 60 484 44.6% 1. respectively as we expect operating costs and provisions to exceed net income contribution by Rs3.9% -23.0% 0.5% -6.0% 1.8% 9.8% 1. Based on our pro-forma numbers for the merged entity.9% 10.901 PostAmalgamation FY11E 98.0% May 24.976 43 446 67. acquisitions or amalgamations. the operating efficiency in the near term takes a hit given the integration issues and higher operating costs delaying the improvement in the core performance and prolonging the benefits to accrue in the longer term.5bn and Rs2.7% -7.0% 4. the re-rating in valuation multiples are also likely to get delayed. Though the deal would yield results in the longer run. we are downgrading oru rating to “Accumulate” valuing the standalone bank at 1. as seen in mergers.8% FY12E 5.ICICI Bank Historically.8 x ABV* 15 x NBAP 12 x PAT 15 x PAT 8% of AUMs 5% of AUMs 1.7% 1.8 x BV Value per share 787 99 10 49 7 17 16 986 % of SOTP 79.0% Basis –FY12E 1.819 FY12E 115. we have reduced ICICI Bank’s earnings by 7. ICICI Securities (combined) ICICI Venture Funds Pru .7% and 6.6% 0.283 40 419 63.5bn at PBT level.141 56 454 -7. we believe that the improvement in core RoEs for ICICI Bank could get delayed due to higher operating and employee expenses and higher credit costs. Hence. with a revised price target of Rs986.3% -6.9% -6. 2010 5 .0% 5.441 FY12E 109.8x FY12E ABV.8% We expect increase in NII on account of ~5% increase in advances We expect sharp increase in operating and staff expenses affecting operating profits PAT is likely to decline due to higher credit costs EPS decline on account of earnings downgrade and dilution of equity Book value to decline on account of equity dilution and adjusting for intangibles arising out of amalgamation Comments PAT EPS BV 47.

100 30. 2010 6 .360 3.000 95.558 Branches acquired 230 112 198 394 463 Consideration per br (Rs m) 7 30 15 241 66 Source: Company Data.ICICI Bank Annexure Some of past M&A deals in Indian banking industry Acquirer IDBI Bank Centurion Bank of Punjab ICICI Bank HDFC Bank ICICI Bank Acquiree United Western Bank Lord Krishna Bank Sangli Bank Centurion Bank of Punjab Bank of Rajasthan Amt paid (Rs m) 1. PL Research May 24.500 3.

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