ICICI reported profit after tax (PAT) of Rs 7.02 bn (down 76% y-o-y, 80% < JPMe), mainly on a one-off of
Rs 36 bn. There could be some sticker-shock impact of the NPL disclosures, but we see the focus gradually shifting away from the legacy loan stress. We see value in the stock at an FY17e (estimates) P/BV (price-to-book value ratio) of 1.1x—core earnings momentum is still steady despite the provisioning pain.
* Asset quality disclosures: The bank disclosed R440 bn in loans below investment grade with stressed sectors and corporate groups. This is the “at-risk” —the definition is conservative as it includes non-funded exposures, 5/25 and corporate group exposure outside stressed sectors. A further R85.7 bn in restructured loans is also vulnerable.
Management expects this pool to account for most of the incremental non performing loans (NPLs) and is working to resolve, recognise, and provision these by FY18.
* In-line with expectations: We have assumed 45% PD, and incremental slippage is in line with our estimates. The total provision charge is raised by 8% as we have upped our LGD assumption from 35% to 50%. We believe that the slippage on this book will be front-ended in FY17—however, the provision charge is likely to be more even given the IRAC norm. The share of incremental NPLs from restructured is likely to be small, so provisioning should be
* Weak operating guidance: Net interest margin (NIM) was down 16bp q-o-q and is likely to fall 20bp further in FY17, driven by rising NPLs and loan book derisking. Retail fees grew 13% y-o-y but corporate fees are still dragging. Retail loan growth is steady at ~25% but corporate growth is expected to be sluggish at 6-7%, with derisking the objective.
SA growth at 6% q-o-q was a bright spot—the retail franchise remains resilient.
* The growth imperative: We think the bank needs to maintain growth momentum to sustain the valuations. While the retail segment remains robust, we expect the balance between derisking and growth to improve from late F17. Visibility on this could be critical for a rerating.