We are raising our fair value estimate for ICICI Bank by 8% to INR 1,359 per share, or USD 45 per GDR, as we roll forward our model to incorporate the fiscal 2014 financial results. We see fee income, especially from its insurance business, as the key to driving profitability at the bank and will be watching developments on this front. For instance, ICICI’s general insurance business recorded its first accounting profit in fiscal 2013, since it began in year 2000, and in fiscal 2014 profits have nearly doubled. This is a key attraction of the insurance business-- once it reaches scale the operating leverage that the business enjoys is enormous. The return on equity (ROE) for ICICI crossed our 14% cost of equity threshold in fiscal 2014, and we would like to see returns sustainably at these levels. Over the last six months the stock has traded up from being undervalued to being fairly valued. The stock now trades at a 7% premium to our new fair value estimate.
We maintain our economic moat rating of "none," as we await further evidence of the bank's ability to keep costs low while continuing to generate high ROEs on a consistent basis, at the consolidated entity level. Over the coming five-year time horizon, we see ROEs expanding to the 15% to 16% range as ICICI's fee-based businesses begin to achieve their potential.
Valuation, Growth and Profitability
We're raising our fair value estimate by 8% to INR 1,359 per share from INR 1,256 as we roll forward our model to incorporate fiscal 2014's financial results. Our valuation represents 1.8 times the bank’s 2015 estimated book value. As before, our fair value is based on a weighted average of our base, upside and downside scenarios which we give a 70%-20%-10% weighting, respectively, to more accurately reflect the future possibilities that await this Indian lender. We must note that there is a wide fluctuation between the quarterly standalone numbers, and the end-of-year consolidated financials that the bank reports. This expands the range of outcomes for the bank’s earnings, and as a result we continue to maintain our very high uncertainty rating on our fair value estimate.
In our base case scenario, we assume that the bank grows its loan book at 12% on average over the next five years with deposit growth trailing at 9% on average. However, we anticipate that this high loan growth does not come at the expense of compromising loan quality and ICICI is able to maintain its loan loss ratio at 1% over the coming five years, similar to the last five years. The most notable change in the coming five years will be the rationalization of the non-interest expenses, which we anticipate will move the efficiency ratio to 59% versus average of 73% over the last five years, as both life and general insurance businesses begin to garner scale benefits. Overall, we think the insurance business' contribution to ICICI's bottom line will further expand ROEs beyond the benchmark 14% COE in fiscal 2015. Henceforth, we expect it to trend higher and settle around 15% to 16%.