ICICI Bank: Jefferies rates ‘buy’; Says core profitability weak even as growth improved

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Published: May 14, 2018 3:21:35 AM

The implied value of the core banking business at CMP is 1x fwd. adj. book based on current market price of ICICI Bank, ICICI Lombard, ICICI Prudential Life and ICICI Securities.

ICICI bank, ICICI bank loan growth, ICICI bank growthCore pre-provision operating profit was 6%+ below JEFe, offset by better credit costs. (Reuters)

Core pre-provision operating profit was 6%+ below JEFe, offset by better credit costs. Fresh NPLs came mostly from known stressed assets and there were a few large recoveries which held up NIMs and lowered gross stressed assets. From now on, revenue and core PPOP trajectory is key, though 15% consol RoE guidance seems a tad soft. Retain Buy, revise price target to Rs 380.

Asset quality stable sequentially

Gross Non-Performing Loans (NPLs) stood at 8.84%, a well expected 100 bps sequential increase. Fresh slippage in the quarter stood at Rs 157.4 bn, but most of it came from already earmarked stressed assets. Consequently, guided watch list came down to Rs 47.3 bn v/s Rs 190.6 bn last quarter. Upgrades and recoveries in the quarter were strong, mainly as a Rs 8.4 bn exposure to a sugar company got upgraded to standard category as its management change condition under SDR was met. The total net stressed assets declined to 7.3% versus 9.1% of net advances sequentially. The provision coverage excluding technically written-off accounts remained stable at 48.4% versus 48.3% previous quarter.

Growth picking up; liability franchise stable

Loan growth came in at 10.4% y-o-y—domestic book grew 13.3% y-o-y while international book was down 4.7% y-o-y. Within the domestic book, retail continued to grow at a fast pace, up 17.6% y-o-y. Retail share in total advances has now grown to 55.2%. CASA ratio stood at 51.7% (150 bps improvement sequentially).

Core profitability weak

Core PPOP was down 1.4% y-o-y on account of muted NII growth of 1.0% y-o-y. NIM for the quarter were at 3.24%, 33 bps lower y-o-y. Core cost to income ratio (ex. treasury income and one-offs) remained elevated at 46.4% versus 43.3% in Q3.

Change in estimates

We largely maintain estimates for FY19, up FY20e by 2.4% and introduce FY21e with a FY18-21e CAGR at 46% (lower base). The forecasts pencil in small improvements in NIM and Opex & normalisation of credit cost to ~ 90 bps over FY20-21e. RoE trajectory should improve to 15% by FY21e.

Valuation/Risks

The implied value of the core banking business at CMP is 1x fwd. adj. book based on current market price of ICICI Bank, ICICI Lombard, ICICI Prudential Life and ICICI Securities. We value ICICI Bank at Rs 380 — value core banking at 1.6x book, the insurance companies & securities at the market price, AMC at 6% of AuM and the rest at Rs 24 per share and a holding company discount of 20%. Downside — poor NPL trend, weak earnings trajectory.

Asset quality – slippages normalise

The total net stressed assets declined further to 7.3% versus 9.1% of net advances sequentially. The provision coverage excluding technically written-off accounts remained stable at 48.4% versus 48.3% sequentially. Rs 157.37 bn was the fresh addition to gross NPAs in Q4FY18, implying a slippage ratio (as a percentage of 12m prior loans) of 12.09%. However, 75% of these slippages came from already earmarked stressed assets watch list. No explicit guidance on slippage or credit cost has been provided, but management is confident of lower slippages in FY19 vs. FY18. Beyond these, additional lumpy slippage was from three identified accounts in gems & jewellery sector with o/s close to Rs 7.9 bn. For this, company made Rs 2.9 bn of provisions through P&L account whereas Rs 5.1 bn was directly debited through reserves & surplus.

Loan growth picking up; liability franchise stable

Loan growth improved to 10.4% y-o-y vs 10.5% y-o-y in Q3FY18.The growth in the domestic book was 13.3% y-o-y. The international book was down 4.7% y-o-y. Within the domestic book, retail continued to grow at a fast pace, up 17.6% y-o-y. Within retail, personal loans, cards and business loan growth were strong. Retail share in total advances has now grown to 55.2%, more than a 10% increase since FY15 (42.4%). Corporate loan grew 6.2%. CASA ratio improved to 51.7% sequentially on closing balances but remained flat at 45.9% on average basis. Cost of deposits were at 4.79% for the quarter while overall cost of funds was down to 4.93%, flat sequentially.

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