ICICI Bank
Rating: Overweight

Q2FY15 earnings at Rs 27.1 bn (15% year-on-year) are in line with our estimates. Other income was slightly higher than our estimates due to Rs 1.65 bn gain from repatriation of profit from overseas branches offset by slightly higher provisioning.

Operating metrics loan growth moderated to 14% y-o-y as corporate growth remained subdued while retail book continued its growth momentum (25% y-o-y) led by mortgages and auto loans–as they entered new geographies. This led to the retail mix improving to 40%. Margins remained firm at 3.42% driven by healthy CASA mix (44%) and moderation in wholesale deposit costs. Fee income growth was moderate at16% y-o-y led by retail fees growing above 20% y-o-y and contributing to 60% of the total fees. Corporate fees, however, were lower due to weaker forex income and slowdown in corporate fees (transactional and commercial banking and lending related fees). Cost income ratio improved to 36.5% as the bank focused on leveraging its technology improvement by curtailing its staff expenses. GNPL (gross non-performing loan) ratio increased by 7 basis points to 3.12% as slippages increased to 1.9%. The restructured book was 3.05%, with the management indicating a pipeline of R18 bn for the remainder this year.

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Earnings outlook: We continue to maintain stable asset quality outlook but increase our loan growth forecast slightly for FY16-17e to 21% y-o-y. Overall we expect steady performance with ROA (return on assets) in the range of 1.8-1.9% and ROE (return on equity) around 16-17% by FY16-17e.

Valuation and risks: ICICI is trading at 2.2x P/AB (price-to-adjusted book value) 12-month forward versus its five-year average of 1.8x P/AB, and 1.9x excluding subsidiaries. We value the stock at 2x 12-month forward adj.book on single stage Gordon growth model, thus, slightly increasing our TP to R1,910 (from R1,814) implying a potential return of 20%. Retain OW (overweight). Key risks: (i) Slower loan growth momentum; (ii) spike in NPLs and credit costs.

—HSBC