ICICI Bank’s Q2FY17 earnings were supported by gains from life insurance stake sale, which the bank used partially to strengthen its balance sheet. Slippages continued to be elevated (from watch list and outside it), a trend likely to sustain over the next couple of quarters. However, deleveraging initiatives by stretched corporate borrowers should augur well for the bank as resolution benefits are expected to play out in ensuing quarters. Management’s conscious stance to build retail-oriented business model continued to be on track (average CASA >41%, retail asset growth >20%, retail fees >10%). We believe, these are challenging times manifested in temporary lull in earnings. However, one must not ignore ICICI Bank’s sheer franchise strength, which will enable it to deliver healthy normalised returns post the turbulent phase. Maintain Buy.
Watch list + restructured book drive incremental stress
Slippages were elevated at R80 bn, largely flowing from corporate/SME segment (>70% from earlier watch list plus restructured book), while retail slippages (R6.4 bn) were on track. Stress accumulation outside the watch list remained high (R15-16 bn). Consequent to slippages (R45.6 billion), upgrades & lower exposures (R16.8 billion), watch list declined to R325 bn (R440 bn in FY16). Restructured book fell to R63.4 bn (R72.4 bn in Q1FY17), taking outstanding monitorable assets to R388 bn (4.1% of exposure versus 5.6% as at FY16).
Traction on building retail oriented model continued
ICICI Bank seems to be making handsome progress on strengthening its retail franchise. Retail assets continued to grow>20% (now form 48% of loans), retail fee income was on track. Further, the bank’s strengthened liability franchise forms the cornerstone of its consolidation strategy (SA growth >20% y-o-y with average CASA ratio at respectable >40%—one of the finest amongst peers). We see this as the most critical change as it lays the foundation of low-risk lending in the next cycle.
Outlook & valuations: Asset quality key; maintain Buy
In spite of stress, we maintain buy given: (i) >25% of current price reflects stable value of subsidiaries; (ii) stable RoA and RoE (1.6%/13%, despite higher credit cost); and c) other operating parameters—CASA and retail assets—are improving consistently. The stock is trading at 1.3x FY16 P/BV. We maintain Buy/so with SoTP of R342.
Loan growth aided by retail; some signs of corporate growth revival
Advances came in at R4.5 trn, up 11% y-o-y, driven by above-average loan growth in domestic loan book (up 16% y-o-y), whereas international book declined (down 4% in R terms). Maintaining the trend, within domestic loan book, retail advances continued to grow at 21% y-o-y, taking proportion of retail advances to 48% (35.5% in FY13). On the other hand, corporate book growth was slower at 8.4% y-o-y largely due to conscious slowdown in stressed segment (bank’s exposure to drill down/watch list sectors has come down to 11.9% versus >16% as at FY12); excluding this (restructured/ NPL/drilled down exposures), growth in corporate book was 20% y-o-y.
Core profitability growth continues to be softer
Higher stress percolated into below-trend NII (flat y-o-y) following lower NIMs (marginally down 3 bps q-o-q, despite 7 bps cushion due to interest from income tax refund). This, along with softer core fee (sub-6% growth), resulted in lower core profitability (flat y-o-y). While credit cost will be a major earnings driver, the improvement in revenue profile will be critical for the bank to deliver on RoE improvement.
Global NIMs during the quarter came in at 3.13% (3.16% in Q1FY17), with domestic NIMs at 3.41% (3.45% in Q1FY17, pressure despite benefit of interest income refund due to higher interest income reversal) and international NIMs at 1.65% (stable q-o-q). Henceforth, the bank expects NIMs to be impacted given pressure on lending yields due to: (i) focus on higher rated corporate credit; (ii) shift towards secured retail credit; and (iii) interest income reversal as slippages will remain elevated. On the other hand, the impact is likely to be limited following strong liability franchise and higher cash levels which will help it reduce funding cost.