ICICI Bank –Buy- Anand Rathi
ICICI Bank plans to acquire Bank of Rajasthan (BoR), a private sector bank with 463 branches and assets of ~Rs172bn. We expect this transaction to be value accretive for ICICI as it would expand its existing branch network by approximately 27%, and strengthen its presence in north India. Retain BUY.
Appears expensive. If approved, the proposed share swap (25 shares of ICICI Bank for 118 shares of BoR) could lead to a dilution of 3.1% for ICICI Bank. This implies approx Rs188 per share for BoR and valuations of 2.9x PBV, 5.5x PABV (9M10), which are not cheap. Yet, at Rs65.9 million/branch, the deal is reasonable, at a 9% premium to that of old private sector peers.
Gains for ICICI. BoR offers a good north-India deposit franchise (302 branches in Rajasthan vs 49 for ICICI). While cost income of BoR’s branches are poor (89.9% in 9M10), there is significant potential to better leverage these. Also, BoR’s asset quality is fine, with 63% NPA coverage and net NPAs of 1.1%. We await final approval of the merger before changing estimates.
A good price for BoR shareholders (89.4% over market price) since (1) the bank is facing fundamental pressure of scale, franchise and profitability; (2) visible asset quality strain in FY10; (3) recent problems with the regulator on promoter shareholding and other violations.
Our target price of Rs1,140 is based on a sum-of-parts valuation. We value the subsidiaries at Rs224.
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