FY19 will be a grind over asset quality; TP revised to Rs 375; ‘Buy’ retained owing to reasonable valuations
ICICI’s Q1FY19 performance was in line – while slippages were lower, reduction in stress book was also very low and additional disclosure of BB and below book indicates that full asset quality normalisation is likely in FY20F as the non-NPA stress book is Rs 200 bn (3.8% of FY18 loans). Operationally, NIMs were weaker, made up by robust core fees and granular build-up of B/S. With the 1-3% lower PPOP revisions, we expect core ROEs of 12% in FY20F and 14% by FY21F.
The focus post this cycle will move to improving quality of the balance sheet with reported CASA of 50%, retail loans at 58% and lower share of low profitability overseas business. Our revised TP of Rs 375 implies 1.65x Sep-20F book with subsidiaries valued at Rs 124/share. Current stock price implies 1.2x Sep-20F adjusted book.
Asset quality – slippages lower but reduction in stress book also lower
Slippages at Rs 40.6 bn were lower than expected but last disclosed stress book reduced by <Rs 10 bn due to impact of rupee depreciation on overseas NPAs and some minor downgrades. Our assessment of the additional disclosure of
Rs 120 bn of BB and below list beyond earlier watchlist is neutral at best – while this crystallises the corporate/SME stress, the run-rate corporate/SME slippages beyond watch list has been Rs 15 bn per quarter.
Weaker margins made up by better fees
Core PPOP was marginally weaker than expected with a miss on NII made up by better fee growth. NIMs of 3.2% included 10bps of benefit from NCLT recovery, adjusted for which NIMs was down 15bps q-o-q – we expect a gradual recovery in NIMs from 2HFY19, driven by MCLR repricing and improving NPA coverage.
Stand-alone ROEs of 14% by FY21F
We expect ROEs of 12% in FY20F and 14% in FY21F, driven by normalisation of credit costs to 110bps in FY20F and 85bps in FY21F.
Asset quality— very little movement in stress book
ICICI bank had slippages of just Rs 40 bn, much lower than our expectations of
Rs 60 bn but there have been very few slippages from the known stress pool to the tune of Rs 18 bn and that is also due to Rs 10 bn of increase in existing NPA account due to currency depreciation related impact on its international GNPA exposure. Total stress book has reduced by just Rs 9 bn from Rs 133 bn to Rs 125 bn owing to this and recognition from this is still pending which is a key negative.