ICICI Bank rated buy by Jefferies

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Published: February 6, 2018 3:07:37 AM

ICICI has to make good on provisions in the RBI list #2 accounts referred under IBC in Q4, but a few resolutions from list #1 may provide a cushion and keep credit costs under check.

While core PPOP was largely in line (flat opex offset weak revenues), lower trading profit led to sharply lower bottom line.

While core PPOP was largely in line (flat opex offset weak revenues), lower trading profit led to sharply lower bottom line. Net stressed assets declined to 8.7% of net customer assets. We hope top line growth revives with resolutions/ lower credit costs aiding RoA improvement. Retain Buy with PT of Rs 410.

Core PPOP: NIM at 3.14% was marginally better while fee income disappointed — management guides for double-digit growth on full year basis. OpEx didn’t grow — employee expense down benefiting from lower retiral-obligation at higher discount rates. Core PPOP was up 7.9% y-o-y. For continued re-rating, core revenue trajectory has to get better, for which we think, capex revival will be key.

Balance sheet: Loans grew 10.5%, although international book shrank 15%. Retail was up 22% — PL, cards, business banking were key contributors. SME too was up 18%. Average CASA ratio improved to 45.7% (50 bps q-o-q).

Asset quality: Total net stressed assets declined further sequentially to 8.7% versus 9.3% of net customer assets. PCR improved to 48.3% versus 45.8% q-o-q. Drilldown list is down to 1.9% of loans. 37% of GNPA has been referred to NCLT which are classified as nonperforming — recovery could boost book value, which is built in our lower credit cost assumption going forward. ICICI has to make good on provisions in the RBI list #2 accounts referred under IBC in Q4, but a few resolutions from list #1 may provide a cushion and keep credit costs under check.

Change in estimates: We lower EPS estimates by 6/2.5/1.2% factoring lower trading income offset by better NIM, revival in fee income & opex control along with lower credit costs. RoE trajectory should improve gradually to 12-14%. Our FY17-20E EPS CAGR is 19%, and adj. BV is 15%.

Valuation/Risks

The implied value of the core banking business at current market price (CMP) is 1.5x fwd. adj. book based on current market price of ICICI Bank, ICICI Lombard (ICICIGI IN, Rs 787, NC) and ICICI Prudential Life (IPRU IN, Rs 406, NC). We value ICICI Bank at Rs 410. We roll forward by a quarter and value the core banking business at 1.8x book (increased valuation multiple on asset quality comfort), the insurance companies at the market price, AMC at 6% of AuM and the rest at Rs 20 per share and we apply a holding company discount of 15%. Downside — poor NPL trend, weak earning trajectory.

Asset quality – slippages normalise

The total net stressed assets (net NPA + net standard restructured + drill-down exposures + standard 5/25 + standard SDR + standard S4A + security receipts) declined further to 8.7% versus 9.3% of net advances sequentially. The provision coverage excluding technically written-off accounts improved to 48.3%.

Fresh slippages to NPA: Rs 46.04 bn was the fresh addition to gross NPAs in Q3FY18, implying a slippage ratio of 3.44% vs 3.64% in Q2FY18. No explicit guidance on slippage or credit cost has been provided.

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