Bank is well placed in a challenging environment, being on track to achieve RoE target; top pick in the sector; ‘Buy’ maintained.
ICICI Bank reported Q2FY20 PAT of `6.5 bn (-28% y-o-y), higher than our estimate of Rs 4.5 bn, led by strong NII and other income. Adjusted for the DTA reversal of `29.2 bn, PAT would have been `35.8 bn. PBT was at Rs 43.7 bn (in-line). For 1HFY20, PPoP grew 19% y-o-y to Rs 131.6 bn, while PAT came in at Rs 25.6 bn compared to Rs 7.9 bn in 1HFY19.
*NII increased 25.6% y-o-y to
Rs 80.5 bn, led by 12.6% y-o-y loan growth and ~15bp q-o-q expansion in the core NIM. Other income grew 33% y-o-y, whereas core fee income increased ~16% y-o-y to `34.8 bn (retail forms 74% of total fees). Total income thus grew 28% y-o-y to Rs 122.5 bn (in-line). Opex increased 24% y-o-y as the bank incurred higher employee expense and added 346 branches in Q2FY20. PPoP thus grew 31% y-o-y (core PPoP: +24% y-o-y).
* Advances grew 12.6% y-o-y, with the domestic book growing at 16% y-o-y (~22% y-o-y growth in retail), while the overseas loan mix declined to 9.8%. Deposit growth was healthy at 24.6% y-o-y. Despite term deposit growth of 35% y-o-y, the CASA mix improved to 46.7% from 45.2% in Q1FY20 (120bp decline on an average basis).
*Fresh slippages moderated to `24. 8 bn, led by a reduction in both retail (`13.2 bn) and corporate (`11.59 bn) slippages. GNPL/NNPL ratios thus improved by 10bp/20bp q-o-q to 6.4%/1.6%. BB and below book increased 5% q-o-q to `160.7 bn, led by rating downgrade of Rs 20.7 bn.
* Other highlights: (i) Retail loan mix increased 70bp q-o-q to 62.1%. (ii) Consolidated performance: ICICIBC reported PAT of `11.3 bn v/s Rs 12.1 bn in Q2FY19.
Valuation and view
In the near term, business growth will be driven by retail, and the share of highprofit making products (mainly by cross sell) like credit cards, personal loans and business banking is likely to go up.
* BB & below pool is showing consistent decline—now at 2.6% of total loans.
Meanwhile, the bank has sharply increased PCR to ~76% (highest compared to peers).
*Retail business metrics remain healthy with (i) average CASA ratio of 42.2%, (ii) contribution to fees at 74%, (iii) a higher share of secured loans and continued healthy growth.
* Strong capitalisation (Tier-1 of ~14.6%), a significant improvement in granularity of book and a sustained improvement in the liability profile are the key positives.
ICICI Bank has delivered a strong operating performance and is showing healthy signs of earnings normalisation. We believe the bank is well placed in a challenging macro environment with its limited exposure to the newly surfaced stressed names and one of the highest coverage in the banking sector. However, the continued weakness in the lending environment and the delay in resolutions may pose a risk to earnings revival. We fine-tune our earnings and estimate FY21 RoA/RoE improvement to 1.6%/15.7%. Maintain Buy with an SOTP-based TP of `550 (2.4x FY21e ABV for the bank). ICICI Bank remains our top pick in the sector.