Asset quality improved in Q3; FY19e EPS down 13.8% owing to higher credit costs in quarter; TP raised to Rs 450
ICICI Bank continues to show promise with trending lower new NPL formation, and balance sheet growth with higher granularity on both asset and liability side. We expect core bank RoE to improve to 16-17% by FY21e. Retain Buy, and revise price target to Rs 450.
Chanda Kochhar case – Bank’s role may yet be over
In a call, Sandeep Bakhshi mentioned that post completion of enquiry under Justice Srikrishna, the bank’s role is now limited to cooperating with regulatory and government authorities. While we are not privy to the content of the enquiry, the Board decided to claw back/revoke all entitlements including bonuses, benefits, unvested and vested but unexercised ESOPs etc., which is also worth a lot of money; just the outstanding stock options as of Mar’18 were 16.78 mn, which may have a nominal worth of $30-50 mn (net of purchase price). We fear legal options being pressed from both sides, pulling in current/past executives, and which at best would be a nuisance and noise, to a worst-case situation of digging out unpleasant issues and being a drag to the stock price.
Asset quality improves
Total net stressed assets declined to 4.4% of loans, as coverage rose sharply to 68.5%. Corporate slippage ( Rs 10.2 bn) were lowest in past 12 quarters, and 93% of it came from already earmarked BB & below pool. Overall slippage ratio for Q3 was 1.48%. Corporate+SME, BB & below book including non-fund exposure was 8.1% (vs 9.4% in Q2).
Growth picking up; liability franchise strong
Loans grew 11.7% y-o-y (domestic +14.4%, international -5.4%). Retail continued to grow fast, up 21.6%, driven by personal loans, cards & business banking. Corporate was flat y-o-y. Average CASA ratio stable at 46% (vs 47.1% in Q2). NIMs for Q3 at 3.4%, 7 bps q-o-q improvement. However, adjusting for income recognition on one-off recovery, margins were flat sequentially. Yield on assets increased 28 bps q-o-q, while cost of funds were up only 18 bps q-o-q.
Core profitability improving
Core pre-provision profit was up 13.5% y-o-y, in line with JEFe. Core fee income grew 16.0% y-o-y. Operating cost was +20.9% y-o-y: (i) higher actuarial provisions, & (ii) higher advertisement costs.
Change in estimates
We cut FY19 EPS estimate by 13.8% due to higher credit costs in Q3 (bank increased provision coverage). We tweak our FY20/21 estimates marginally by +1.2% and +3.0%, forecast FY18-21e EPS CAGR at 47.5% (lower base). Core bank RoE trajectory should improve gradually to 16-17% by FY21e.
Asset quality—slippages normalise, provision coverage increases
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 4.4% (versus 5.8%) of net advances sequentially. The provision coverage excluding technically written-off accounts increased sequentially to 68.5% versus 59.5%.
Loan growth picking up; liability franchise strong
Loan growth improved to 11.7% y-o-y. Within the domestic book, retail continued to grow at a fast pace, up 21.6% y-o-y. Retail share in total advances has now grown to 59.0%, more than a 15% increase since FY15. Domestic corporate loans were flat y-o-y.
Overall deposits grew at 17.3% y-o-y, driven by term deposit growth of 19.7%. Focus metric would be CASA along with retail term deposit. CASA ratio (average) moderated slightly to 49.3% (vs 50.8% in Q2). Cost of deposits were at 4.88% for the quarter, 12 bps increase sequentially. Overall cost of funds was 5.0%, 18 bps increase sequentially. At the same time, yield on assets increased 29 bps sequentially to 8.05%.