1. ICICI Bank rated ‘Outperform’ by Credit Suisse on topline being higher than expected

ICICI Bank rated ‘Outperform’ by Credit Suisse on topline being higher than expected

ICICI Bank’s Q4 profits were largely in line with street estimates. Topline performance was better than expected on account of higher NIMs and contained opex.

By: | Published: May 8, 2017 3:45 AM
ICICI Bank’s Q4 profits were largely in line with street estimates.

ICICI Bank’s Q4 profits were largely in line with street estimates. Topline performance was better than expected on account of higher NIMs and contained opex. While NPL additions spiked, the bulk of it was from “known” stress. However, provision cover has dropped further and credit costs will stay elevated. Overall loan growth was muted though domestic loan growth was better on the back of 19% retail growth. Stronger CASA growth aided the NIM surprise in the quarter. However, with shift in loan mix (to mortgages and better rated corporates) and lending rate cuts, management guided to a moderation in NIMs.

NPL additions spiked to Rs 110 bn, pushing gross NPAs to 8.7%, (NPL cover at only 40%). With large slippage, watch-list shrunk to Rs 190 bn. However, non-NPL stress is still at 6% and with low provision cushion, credit costs are likely to stay elevated. With CET1 at 13.7% and subsidiary stake sale potential the bank is comfortable on capital. Non-bank subs continue to do well and adjusted for this stock’s valuation at 1x book is inexpensive. Cut EPS by 2% and raise target price to Rs 340 (from Rs 316) on roll forward.

Loan growth remains muted, NIMs improve

ICICI Bank’s Q4 profits were largely in line with street estimates. Topline performance was better than expected on account of higher NIMs and contained opex. While fee income was stable at 11%, other income was lower on account of the reversal of forex income booked in 9M17. Overall loan growth was muted at 7% though domestic loan growth was better at 14% on the back of 19% retail growth.

Management expects domestic loan growth at 15% (driven by retail) and overseas book to remain flat. CASA growth was stronger at 28% y-o-y, which aided the NIM surprise in the quarter. NIMs also increased on account of higher upgrades as well as income tax reversal. However, with a shift in loan mix (to mortgages and better-rated corporates) and lending rate cuts and shift to MCLR, management guided to a moderation in NIMs.

Increase in slippages

Non Performing Loan (NPL) additions spiked to Rs 110 bn (of this Rs 58 bn was on account of a cement account which management expects to partly be upgraded in FY18), largely on slippage from watch list, which pushed GNPAs to 8.7%. Credit cost was flat q-o-q at 240 bp, with NPL cover declining to 40% despite the use of Rs 15 bn of contingency provisions as the bank wrote off Rs 55 bn of loans. With large slippages in FY17, watch-list shrunk to Rs 190 bn (4% of loans). However, non NPL stress is still at ~6% and with low provision cushion credit costs are likely
to stay elevated.

Capital position remains comfortable

With CET1 at 13.7% and subsidiary stake sale potential, the bank is comfortable on capital. Non-bank subs continue to do well and adjusted for this the stock’s valuation at 1x FY19e book is inexpensive. We cut our EPS estimates by 2% on higher credit costs and increase our TP to Rs 340 from Rs 316 as we roll forward. Outperform.

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