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Home , Bank of Rajasthan, Lord Krishna Bank

Event Update | Banking May 18, 2010

ICICI Bank BUY Merger with Bank of CMP Rs889 Target Price Rs1,169

The Board of Directors of ICICI Bank has granted its in-principle approval for the Investment Period 12 months amalgamation of (BoR) with ICICI Bank, subject to further approvals. The swap ratio has been fixed at 25:118 (25 shares of ICICI Bank for Stock Info 118 shares of BoR). Sector Banking

As on March 31, 2009, Bank of Rajasthan had 463 branches and 111 ATMs, total Market Cap (Rs cr) 99,167 assets of Rs17,224cr, deposits of Rs15,187cr and advances of Rs7,781cr. It reported Beta 1.4 net profit of Rs118cr in FY2009 and net loss of Rs10cr in the 9MFY2010. In our 52 Week High / Low 1010/607 view, the main benefit of the merger for ICICI Bank is BOR's branch network, Avg Daily Volume 1257898 concentrated in northern states like Rajasthan (60% ot total branch network), Punjab, Face Value (Rs) 10 Haryana and Delhi. Bank of Rajasthan was the only potential acquisition target BSE Sensex 16,876 amongst the old private sector banks to have such a presence, while all its other peers have largely branch networks concentrated in the south. Nifty 5,066 Reuters Code ICBK.BO Outlook and Valuation: Based on the swap ratio, ICICI Bank has valued BoR at 5.3x FY2010E ABV (at an 89% premium to yesterday's closing price), which is Bloomberg Code ICICIBC@IN expensive in our view, considering the poor profitability and the recent asset-quality pressures and corporate governance issues with the Bank of Rajasthan. Further, in Shareholding Pattern (%) such an acquisition, there is downside risk from further NPAs from the target bank's Promoters - existing loan book. MF / Banks / Indian Fis 27.6 Looking at it from a market cap per branch basis, the acquisition looks less FII / NRIs / OCBs 66.1 expensive. As per our calculations, old private banks are trading at an average Indian Public / Others 6.3 MCap/branch of Rs5.4cr at current prices. Based on the swap ratio announced, the MCap/Branch paid for BoR works out to Rs6.6cr, which indicates a premium of Abs. (%) 3m 1yr 3yr 21% to the peer average. If we compare the HDFC Bank and CBoP deal in FY2008, Sensex 3.4 18.1 18.0 HDFC Bank had paid a consideration of Rs24.1cr per branch for CBoP. ICICI Bank 6.0 25.9 (6.5) That said, at about 3.2% of ICICI Bank's market cap and 4.5% of Total Assets, in our view, the acquisition is too small to have any material impact on ICICI Bank. At the CMP, ICICI Bank is trading at 1.5x its FY2012E ABV (excl. subsidiaries) (without factoring the acquisition into our estimates). We maintain a Buy on the stock, with a Target Price of Rs1,169, representing an upside of 31%.

Exhibit 1: Valuations of Old private Banks Bank Market Capitalisation Branches MCap/Branch (Rs cr) (No.) (Rs cr) Bank of Rajasth. 3,039 463 6.6 * 1,326 202 6.6 Dhanalaksh.Bank 944 265 3.6 Vaibhav Agrawal 5,256 672 7.8 +91 22 4040 3800 Ext: 333 2,033 458 4.4 Email: [email protected] * 2,770 320 8.7 Lak. Vilas Bank 775 270 2.8 Amit Rane South Ind.Bank 1,645 580 2.8 +91 22 4040 3800 Ext: 326 Average 5.4 Email: [email protected] Source: Company, Angel Research; Note: *As on March 31, 2009

Please refer to important disclosures at the end of this report ICICI Bank | Event Update

Exhibit 2: Per Branch Analysis - Old Private Banks (Rs cr) Dena Federal South Ind CBoP* BOR Bank Bank Bank Branches (Nos) 1,223 672 580 394 463 Networth 2,434 4,758 1,466 2,080 601 Networth/Branch 2.0 7.1 2.5 5.3 1.3 Mkt Cap 2,646 5,256 1,645 9,510 3,014 Mkt Cap / Branch 2.2 7.8 2.8 24.1 6.6 Deposits 51,344 36,706 18,090 20,700 15,200 Deposits/Branch 42 55 31 53 33 CASA 18,320 8,993 5,339 5,072 4,550 CASA/Branch 15.0 13.4 9.2 12.9 9.9 PAT 511 541 234 103 118# PAT/branch 0.4 0.8 0.4 0.3 0.3# Source: Company, Angel Research Note: *CBOP nos. as on 3QFY2008, #FY2009 PAT

Exhibit 3: M&A Deals in Indian Banking Sector Acquirer Target Consideration No. of Consideration (Rs cr) Branches Per Branch (Rs cr) IDBI Bank 150 230 0.6 CBOP 336 112 3.0 ICICI Bank Sangli Bank 300 198 1.5 HDFC Bank CBOP 9,510 394 24.1 Source: Company, Angel Research

Evaluating branch potential: Keeping aside the risk of further book value erosion from fresh NPA accretion post-acquisition, even the existing capital adequacy of BOR is on the lower side. Moreover, in our view, on a higher level of business per branch (from Rs37cr assets / branch at present to about 50cr), the normalised Networth per branch would have to be atleast Rs2.5-3.5cr, while BOR's existing Networth per branch is Rs1.3cr. If we add this additional capital requirement to the acquisition price, then per branch acquisition price would be about Rs8.8cr (assuming NW / branch of Rs3.5cr). At this level, BOR's implied P/BV would work out to about 2.5x, not taking into account the 2-3 years it may take to scale up the productivity of these branches. Even on this basis, the acquisition looks expensive relative to peers.

Exhibit 4: ICICI Bank & BOR: Key Numbers FY2010 FY2009 As % of (Rs cr) ICICI Bank BOR ICICI Bank Branch Network (No.) 2,000 463 23.2 Total Assets 3,75,839 17,235 4.6 Advances 1,81,206 7,781 4.3 Deposits 2,02,017 15,187 7.5 CASA Ratio (%) 41.7 27.4 Capital Adequacy Ratio (%) 19.4 11.5 Gross NPA Ratio (%)* 5.1 2.8 Gross NPAs* 9,481 232 2.5 Source: Company, Angel Research Note: *As Reported on 31st Dec, 2009 for BOR

May 18, 2010 2 ICICI Bank | Event Update

Income Statement (Rs cr) Rs crore Key Ratios

Y/E March FY2009 FY2010E FY2011E FY2012E Y/E March FY2009 FY2010E FY2011E FY2012E

Net Interest Income 9,092 8,114 9,378 11,538 Profitability Ratios (%) YoY Growth (%) 10.9 (10.8) 15.6 23.0 NIMs 2.6 2.4 2.5 2.5 Other Income 7,783 7,478 8,828 10,731 Cost to Income ratio 41.7 37.6 40.0 42.7 YoY Growth (%) (12.3) (3.9) 18.1 21.6 RoA 0.9 1.0 1.1 1.3 Operating Income 16,875 15,592 18,206 22,269 RoE 9.2 9.6 11.5 15.0 YoY Growth (%) (1.2) (7.6) 16.8 22.3 B/S Ratios (%) Operating Expenses 7,045 5,860 7,284 9,504 CASA ratio 28.7 41.7 42.7 43.6 YoY Growth (%) (13.6) (16.8) 24.3 30.5 Pre - Provision Profit 9,830 9,732 10,923 12,766 Credit/Deposit ratio 100.0 89.7 89.7 90.4 YoY Growth (%) 10.1 (1.0) 12.2 16.9 CAR 14.5 19.4 15.5 15.1 Prov. & Cont. 5,048 4,387 3,961 3,310 - Tier I 11.0 11.7 9.6 8.4 YoY Growth (%) 30.4 (13.1) (9.7) (16.4) Asset Quality (%)

Profit Before Tax 4,782 5,345 6,962 9,456 Gross NPAs 4.3 5.1 4.5 4.0

YoY Growth (%) (5.4) 11.8 30.2 35.8 Net NPAs 1.6 2.1 1.4 1.1

Prov. for Taxation 1,359 1,320 1,961 2,691 Slippages 2.2 2.0 1.9 1.5 as a % of PBT 28.4 24.7 28.2 28.5 NPA prov. / avg. assets 1.0 1.1 0.9 0.6 PAT 3,423 4,025 5,000 6,765 Provision coverage 63.1 59.5 70.6 73.8 YoY Growth (%) (17.7) 17.6 24.2 35.3 Per Share Data (Rs)

EPS 30.7 36.1 44.8 60.7

Balance Sheet Rs crore ABVPS (75% Cover) 434.6 450.3 483.1 518.1 Y/E March FY2009 FY2010E FY2011E FY2012E DPS 11.0 12.0 15.5 21.5

Share Capital 1,463 1,465 1,465 1,465 Valuation Ratios - Equity 1,113 1,115 1,115 1,115 P/E (x) 28.9 24.6 19.8 14.7 - Preference 350 350 350 350 P/ABVPS (x) 2.0 2.0 1.8 1.7 Reserve & Surplus 48,420 50,573 53,209 56,794 Dividend Yield 1.2 1.3 1.7 2.4

Deposits 218,348 202,017 250,501 310,621 DuPont Analysis

Growth (%) (10.7) (7.5) 24.0 24.0 NII 2.4 2.2 2.3 2.3

Borrowings 67,324 77,049 92,746 111,660 (-) Prov. Exp. 1.3 1.2 1.0 0.7

Tier 2 Capital 25,482 29,304 36,337 45,421 Adj. NII 1.1 1.0 1.3 1.7 Other Liab. & Prov. 18,265 15,431 22,079 28,450 Treasury 0.5 0.3 0.2 0.1 Total Liabilities 379,301 375,839 456,336 554,410 Int. Sens. Inc. 1.5 1.3 1.6 1.8 Cash balances 17,536 27,514 17,535 23,297 Other Inc. 1.6 1.6 1.9 1.9 Bank balances 12,430 11,359 13,837 16,860 Op. Inc. 3.1 3.0 3.4 3.8 Investments 103,058 133,332 173,089 200,431 Opex 1.9 1.6 1.8 1.9 Advances 218,311 181,206 224,695 280,869 PBT 1.3 1.4 1.6 1.8 Growth (%) (3.2) (17.0) 24.0 25.0 Taxes 0.4 0.4 0.5 0.5 Fixed Assets 3,802 3,800 4,490 5,307 RoA 0.9 1.0 1.1 1.3 Other Assets 24,164 18,628 22,690 27,647 Leverage 10.1 9.6 10.1 11.8 Total Assets 379,301 375,839 456,336 554,410 Growth (%) (6.3) (0.9) 21.8 21.8 RoE 9.2 9.6 11.5 15.0

May 18, 2010 3 ICICI Bank

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Disclosure of Interest Statement ICICI Bank 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to -15%) Sell (< -15%) ICICI Bank

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