ICICI stock: Kotak Institutional Equities maintains ‘buy’ rating

By: | Updated: June 15, 2015 5:21 PM

Over a half of slippage comes from restructured loan portfolio

ICICI bank profitICICI Bank is steadily building a strong business on the retail side, from asset and liability angles. (Reuters)

ICICI Bank’s shift to retail is showing desired results with the retail share of profit rising to 17% in FY15 from 5% in FY11. The corporate division reported another disappointing year of flat earnings due to high provisions. The share of slippages from the restructured book was 55%, primarily through the CDR (corporate debt restructuring) forum.

Despite the challenges, we maintain our positive view, driven by the retail story and an improving macro. Maintain Buy (TP—target price— unchanged at R400).

Retail continues to shine: ICICI Bank is steadily building a strong business on the retail side, from asset and liability angles. Profit before tax grew 50% year-on-year in FY15 and contributes 17% to overall earnings on the back of a 25% y-o-y revenue growth and negligible provisions.


Strong disbursements of retail loans continued in FY15  (up 32%), leading to a >25% loan growth. Corporate division earnings aga-in disappointed as these were flat since FY12, primarily on high provisions (33% y-o-y). Loan growth in the stressed sector is slowing, a positive. Income from treasury spiked on higher dividends from subsidiaries. Dividend income and treasury income came to 25% of non-interest income.

Slippages from restructured loans high: Gross NPLs (non-performing loans) in the non-retail portfolio rose 200 basis points to 5% of the overall loans. FY15 saw a large rise in NPLs due to slippages in restructured loans. About 57% of slippages in FY15 was explained by restructured loans (comprising 40% of the opening restructured loans).

NPLs in the power portfolio are negligible and 33% of the net rise in gross NPLs came from the shipping sector.


How subsidiaries fair: The performance of international subsidiaries was fairly weak with RoEs (returns on equity) <5% for the UK and Canadian business. Most other subsidiaries reported strong performance. RoEs in life insurance were impressive at >20% in the insurance business.

Impairment mostly in corporate portfolio: FY15 saw gross NPLs increase by 75 bps y-o-y while net NPLs rose 65 bps to 1.6% of loans, leading to a drop in the provision coverage ratio. The high share of NPLs in the retail portfolio is almost fully provided (>90% coverage). So the bank is able to write-off these loans with negligible provisions, which helps it cushion the impact on headline NPL ratios. The bank has written-off much fewer loans compared to FY14, which could be due to the pressure on earnings.


Fresh NPLs are mostly from the corporate segment. Gross NPLs in the corporate book increased by >200bps to 5% of loans while the net NPL ratio doubled y-o-y to 2.4% of loans, resulting in the provision coverage ratio dropping to 55% in this portfolio as compared to 70% in FY13. The most disturbing trend was the performance of the restructured loan portfolio with 55% of total slippages from this segment, as compared to 16% in FY14 and 12% in FY12. It does appear that a large share of the slippages were from chunky corporate loans.

The management has guided that credit costs are unlikely to exceed 90-100 bps in FY16 (100bps in FY15) despite it guiding for better impairment trends.

NIM improvement of 15 bps: FY15 saw NIM (net interest margin) improve by 15 bps on the back of a marginal improvement in spreads. NII grew 16% y-o-y on the back of 14% in loan growth and 9% in the balance sheet. Spreads expanded 8 bps y-o-y.

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