Buy rating on ICICI Bank; Top pick in the sector

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Updated: November 9, 2015 7:22:25 AM

Stable performance once again. ICICI Bank reported a steady quarter with headline impairment ratios declining 10bps.

ICICI BankNon-interest income grew 10% y-o-y on the back of ~60% y-o-y growth in investment income, while core fees increased by only 6% y-o-y. (Reuters)

Stable performance once again. ICICI Bank reported a steady quarter with headline impairment ratios declining 10bps. Fresh slippages were 2.2% of loans and it does appear that the bank could report lower impairments than that of FY2015. Retail loan growth is impressive at 25% y-o-y (year on year) and NIM (net interest margin) stable q-o-q (quarter on quarter) . Healthy CASA (current account savings account) ratio, steady shift towards retail loans, healthy tier-1 ratio and improving macro conditions are driving our positive rating. Maintain BUY with TP (target price) at Rs 375 (from Rs 390 earlier).

Underlying trends unchanged; transition to retail continues at a steady pace

ICICI Bank reported 12% y-o-y earnings growth on the back of 12% y-o-y revenue growth and 11% y-o-y growth in provisions. On the positive side  (i) retail loans led overall loan growth (44% of overall loans and growing at a healthy pace of 25% y-o-y)  (ii) NIM has held at 3.5% q-o-q (iii) CASA grew 13% y-o-y with savings account deposits growing 14% y-o-y. Overall CASA ratio is at 45%, with the average CASA ratio at 41% (iv) Fresh slippages were at 2.2% with negligible fresh restructuring. Overall, impaired loans declined 10bps q-o-q to 6.7% of loans (v) Cost income ratio has been maintained at 38%, but staff costs have still grown 12% y-o-y. The bank has announced a minor stake sale of 9% in general insurance, which values the business at Rs 172 bn.


Guidance unchanged; revenue growth is the key concern

Similar to the last quarter/year, the management has maintained its guidance on loan growth with greater focus on retail, impairments/credit costs and fee income. 1HFY16 performance gives adequate comfort in meeting these target metrics. However, the key concern is revenue mix that needs to be addressed at the earliest to show better RoEs. Subdued loan growth is delaying leverage and the bank’s ability to drive revenue growth on the back of NIM is limited from hereon. We are yet to see improvement in the contribution or the quality of revenues in non-interest income, resulting in the bank keeping tight control of costs and drop in coverage ratios.

Maintain BUY; it is our top pick in the sector

We maintain our BUY with a TP of Rs 375 (Rs 390 earlier), factoring in the earnings revision. We value (i) the bank at 2X book (adjusted for NPLs and subsidiaries) and 15X EPS for RoEs in the range of 15% and 13% CAGR in earnings (ii) international subsidiaries at 0.6X book (iii) life insurance at R32/share. ICICI Bank remains our preferred idea in the banking space as we like the transition in the retail portfolio and focus on low risk corporate business, strong liability franchise backing this growth on a profitable basis and improvement in RoEs over the medium term.
Slippages increase ~50 bps q-o-q; total stressed loans decline
Gross NPL and net NPL increased marginally q-o-q to 3.8% and 1.7%, but total restructured assets declined ~30 bps q-o-q to 2.9%. Fresh slippages increased to 2.2% of loans from 1.7%. Of this ~40% of the slippages were from standard restructured loans which, although higher than 20% in the last quarter, are lower by 50% average in FY2015. Stability in absolute NPL is positive given strong growth in the retail loan book.

Loan growth at 13% y-o-y, retail growth is strong at 25% y-o-y

We maintain our positive view on the loan mix shift at the ICICI Bank. In the current quarter, loans grew 13% y-o-y with healthy growth in retail (25% y-o-y) and slower growth in the corporate segment. The current growth in corporate book is mainly from working capital loans and loans to better rated companies and PSUs. The share of retail loans has increased ~100 bps q-o-q to 44% from 37% in FY2013. The bank is likely to change the mix in the retail loan portfolio with a higher share of loans coming from the unsecured loan portfolio, as compared to secured loans currently.

Strong performance on retail deposits continues

Overall deposit growth was 9% y-o-y, with CASA growth higher at 12% y-o-y. CASA ratio improved 100 bps q-o-q to 45.1%. Daily average CASA ratio was flat q-o-q at 41%. We are convinced on the liability business of the bank and see it sustaining at closer to current levels.

Reported NIM flat q-o-q at 3.5%

NIM was flat q-o-q at 3.5% but up 10 bps y-o-y. Domestic NIM continued to decline with 6 bps q-o-q decline to 3.8%, while international NIM increased by 12 bps to 2.0%. The improvement on the international side has come from active refinancing, thus reducing the cost of funds overseas and also reduction in excess liquidity on the balance sheet.

Non-interest income – 10% y-o-y growth driven by treasury; core fees growth soft

Non-interest income grew 10% y-o-y on the back of ~60% y-o-y growth in investment income, while core fees increased by only 6% y-o-y. Retail fee growth would be closer to 15% y-o-y while corporate fees have declined. This growth has largely come from the retail segment (63% of the fees) as the performance of the corporate banking portfolio was fairly weak.

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