Buy ICICI Bank; Target Of Rs 1180: Emkay

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.

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.

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%.