Buy rating on ICICI Bank; Asset quality inching up

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Updated: August 10, 2015 11:00:36 AM

Challenges remain in restructured book

ICICI Bank MK SharmaSlippages of Rs 16.7 bn were lower vs our estimate due to just Rs 2.9 bn slippages from restructured book.(Reuters)

Core PPOP (pre-provision operating profit) grew 15% year-on-year in line with loan growth. (ii) Retail growth trends remain strong (26% y-o-y) and that is largely aiding growth. (iii) Expected 10 basis points margin contraction in domestic business was netted off by 17 bps expansion in overseas margins, which the management expects to sustain. (iv) Core fee growth of 9% was in line and with retail now contributing 63% of fees and growing 15-20%, risk to core fee growth is low.

Slippages of Rs 16.7 bn were lower vs our estimate due to just Rs 2.9 bn slippages from restructured book. The management was more confident of asset quality vs H2FY15 and explained that its restructured book is more granular now (largest exposure of R6 bn) and the scope for negative surprise will be lower. Refinancing also was low (<R10 bn) but we expect some pick-up given its exposure in some of the account referred for 5:25 re-financing.

Trading at reasonable valuations; maintain Buy: Part of the expected pain from stressed groups is reflected in ICICI’s under-performance of 30% YTD (year-to-date) vs peers. Valuation seems reasonable at 1.65x FY17F BVPS (book value of equity per share) of R146 and hence we maintain our Buy rating.


Lower slippages from restructured book aid total impairments
* Slippage of R16.7 bn was lower than R23 bn we expected and significantly lower than R28 bn of slippage run-rate in H2FY15.
* Of total slippages, only R2.9 bn of slippages (15%) were from the restructured book. In FY15, 55% of incremental slippages were from the restructured book. While challenges in restructured book remains, ICICI mentioned that the largest restructured account is just 5% of restructured book (R6 bn) and hence lumpiness is likely to be lower than FY15.

ICICI incrementally restructured R19.6 bn of loans, similar to the guidance of Q1FY16 pipeline and it does not have any pipeline left for restructuring.

In 5:25 refinancing, there were R10 bn of rescheduling in Q1and the management indicated that the pipeline of 5:25 refinancing is not very large. The management maintained its guidance of lower impairment in FY16 vs FY15 and credit cost guidance of 90-95bps.

Domestic growth remains robust driven by retail growth
* ICICI bank reported 15% y-o-y growth driven by largely driven by domestic growth of 17% y-o-y. Domestic growth was largely driven by retail growth of 24%, of which mortgages grew by 26% and auto loans grew by 21% y-o-y.
* Domestic corporate loan growth was steady at 9% y-o-y.
* CV (commercial vehicle) loan book contracted 6% y-o-y largely due to run down in bought out portfolio sequentially, there has been a growth in the CV book.

NIM performance aided by international NIM
* Margins dipped by just 3 bps q-o-q to 3.54% vs 10 bps of margin contraction we expected. While domestic margins fell 10 bps q-o-q on expected lines, margins were aided by a 17 bps q-o-q increase in overseas margins, which we find surprising.
* Improvement in international margins was largely due to reduced cost of funds and the bank expects it can sustain 1.7-1.8% margins vs 1.65% margins.
* CASA (current account savings account) growth moderated to 12.4% y-o-y from 14-15% y-o-y growth trend in the past few quarters with slowdown in SA growth to 14% y-o-y vs 15-16% growth in SA over the past few quarters.

Management has guided to maintain NIMs at FY15 levels despite the falling rate environment.

Non-income growth impacted by lower treasury profits
* Core fee income growth improved to 9% y-o-y from 6% seen in FY15 with 15-20% growth in retail fees, but corporate fees continue to decline.
* Retail fees constituted 63% of total fees vs 60% in FY15.

Subsidiary performance

Life insurance has seen strong growth in APE (annual premium equivalent) of 38% y-o-y. NBP (new business profit) margins of 13.8% remained stable vs 13.6% NBP margins reported in FY15.
* Turnaround seen in general insurance business continues with strong profitability.
* AMC (asset management) business is seeing an improvement in profits (up 32% y-o-y in Q1FY16).
* Capital blocked in UK/Canada banking subsidiaries has come down from 11% of total net worth to 5.4%. UK subsidiary has seen profitability impacted due to loan loss provisions ($0.5 million vs $6.3 million).

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