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ICICI Bank Ltd. - ADS (IBN)

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We are downgrading our recommendation on ICICI Bank Ltd. (IBN) to Underperform primarily on rising operating expenses. Net earnings for the second quarter of fiscal 2012 increased, but a substantial increase in operating expenses was the headwind.

We anticipate continued synergies from the company's increased dependence on domestic loans, an almost stable funding base and market leadership in the insurance business. However, we are concerned about ICICI's highly competitive operating environment and below-average credit quality.

Our six-month target price of $26.00 per ADS equates to about 12.3x our earnings estimate for fiscal 2012. This target price implies an expected negative total return of 8.6% over that period. This is consistent with our Underperform recommendation on the ADSs.

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