US subprime asset woes not to impact
ICICI Bank has significantly underperformed over last week at absolute level as well relative to Sensex driven by worries on its exposure to the Collateralised Debt Obligations (CDO). Our conversation with the management reveals that the bank has total CDO exposure of Rs60bn of which 30% is to investments outside India. We do not see much impact on ICICI Bank's earnings as it comprises only ~0.5% of its total assets or 3.8% of FY08E book value.
Rs 18 billion exposure to international CDO
ICICI Bank's total exposure to the CDO investments is approximately Rs60bn, of which nearly Rs42bn (70%) is domestic exposure. The balance 30% or Rs18bn which is international CDO, the exposure is primarily to the corporate papers and not to retail or subprime mortgage market.
Only loss could be MTM provision if yields move up
If the yields on the CDO obligation start moving up because of the subprime mortgages going bad, the CICI Bank may have to provide MTM losses on the international CDO obligations. However, these obligations are very insignificant by their size and 100bps increase in the yield on the international CDO portfolio could hit the earnings by 600mn or 1.4%. If ICICI Bank were to write off the whole portfolio, it would hit the earnings for FY08 by 40%. However, the impact on FY08E book value would only be 3.8%.
Stock may underperform in short term but for other reasons
We believe that ICICI Bank's stock may underperform the broader market but for two other reasons:
The bank has seen significant rise in its NPA as gross and net level over past few quarters
FIPB has rejected the stake placement (5.9% for USD650mn) in the bank's subsidiary ICICI Financial Services for the reasons that it may indirectly increase foreign stake in the insurance company above 24%. While ICICI Bank has given necessary clarifications to the board, nod is yet to come.
Valuations still look attractive
At the current market price of Rs880, the stock is quoting at 2.0x FY09E ABV with likely RoE of 12.0% in FY09E. On PER basis, the stock trades at 17.0x FY09E EPS, with earnings (diluted) CAGR of 23% over FY07-09E. We maintain our BUY recommendation on the stock with price target of Rs 1180.
ICICI Bank has significantly underperformed over last week at absolute level as well relative to Sensex driven by worries on its exposure to the Collateralised Debt Obligations (CDO). Our conversation with the management reveals that the bank has total CDO exposure of Rs60bn of which 30% is to investments outside India. We do not see much impact on ICICI Bank's earnings as it comprises only ~0.5% of its total assets or 3.8% of FY08E book value.
Rs 18 billion exposure to international CDO
ICICI Bank's total exposure to the CDO investments is approximately Rs60bn, of which nearly Rs42bn (70%) is domestic exposure. The balance 30% or Rs18bn which is international CDO, the exposure is primarily to the corporate papers and not to retail or subprime mortgage market.
Only loss could be MTM provision if yields move up
If the yields on the CDO obligation start moving up because of the subprime mortgages going bad, the CICI Bank may have to provide MTM losses on the international CDO obligations. However, these obligations are very insignificant by their size and 100bps increase in the yield on the international CDO portfolio could hit the earnings by 600mn or 1.4%. If ICICI Bank were to write off the whole portfolio, it would hit the earnings for FY08 by 40%. However, the impact on FY08E book value would only be 3.8%.
Stock may underperform in short term but for other reasons
We believe that ICICI Bank's stock may underperform the broader market but for two other reasons:
The bank has seen significant rise in its NPA as gross and net level over past few quarters
FIPB has rejected the stake placement (5.9% for USD650mn) in the bank's subsidiary ICICI Financial Services for the reasons that it may indirectly increase foreign stake in the insurance company above 24%. While ICICI Bank has given necessary clarifications to the board, nod is yet to come.
Valuations still look attractive
At the current market price of Rs880, the stock is quoting at 2.0x FY09E ABV with likely RoE of 12.0% in FY09E. On PER basis, the stock trades at 17.0x FY09E EPS, with earnings (diluted) CAGR of 23% over FY07-09E. We maintain our BUY recommendation on the stock with price target of Rs 1180.
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