ICICI Bank BFSI | India Institutional Equity Research 4QFY19 Result Update | May 07, 2019 1 CMP* (Rs) 401 Upside/ (Downside) (%) 15 Bloomberg Ticker ICICIBC IN Market Cap. (Rs bn) 2,587 Free Float (%) 100 Shares O/S (mn) 6,446 BUY Target Price: Rs460 High Provisions Impact Earnings; Credit Cost to Moderate ICICI Bank has reported healthy operating performance in 4QFY19 with NII and core pre-provision operating profit (PPOP) growing by 27% and 49%, respectively, exceeding our estimates. However, its net profit at Rs9.7bn missed our estimate owing to elevated provisioning on ageing of NPA accounts and on recognition of several big-ticket exposures as NPAs (including IL&FS, Jet Airways and a sugar sector exposure). This also resulted in higher quarterly slippages at 2.8% (annualised). Nonetheless, gross NPLs declined by a sharp 110bps QoQ led by higher write-offs of Rs73bn. Margin expanded by 30bps QoQ mainly due to interest on I-T refund (~20bps impact) and sequentially lower interest reversals. CASA deposits grew by a healthy 8% QoQ, with stable CASA ratio sequentially, though quarterly average CASA ratio declined by 150 bps QoQ. At the same time, barring the AMC subsidiary, profitability of most others declined sequentially with ICICI Home Finance reporting a small loss. Going ahead, we expect expansion in RoE to be driven by improving margin and lower credit cost. Credit Cost to Decline Sharply Hereon With asset quality recognition cycle nearing its end and ageing related provisions having largely played out, we expect credit cost to decline to 1.1% in FY20E against 3.7% in FY19. Sustained decline in concentration risk and increasing share of higher rated corporate loans allude to strengthening of the Bank’s corporate portfolio. Excluding the sugar sector account where payment obligations continue, slippages were better than expectations. Additionally, moderation in ‘BB & Below’ book to 3% of advances gives comfort on incremental corporate slippages. Healthy Domestic Growth, Rising Retail Share to Aid Margin Domestic loan book grew by 17% YoY with a healthy 22% YoY growth in retail book. Business banking and unsecured loans grew ~40% YoY each albeit on a small base. With strong liability franchise, superior customer outreach across business segments and a healthy capital position, we expect the Bank to continue to grow its retail portfolio which now constitutes 60% of the bank’s advances against 47% three years ago. Improved pricing power and higher share of small-ticket loans are expected to aid the Bank’s margin over FY20-21E. Outlook & Valuation We believe that the Bank is approaching the end of recognition of stressed loan cycle, which along with improving PCR clearly indicates sharp moderation in credit cost, going forward. Further, the bank’s strong liability franchise with industry best CASA level and healthy capitalisation add to our comfort. Looking ahead, we expect the Bank to deliver sustained improvement across operating metrics led by dwindling headwinds on asset quality front and improving balance sheet. Trimming our earnings estimates to factor slightly higher provisions, we maintain our BUY recommendation on the stock with an SOTP-based Target Price of Rs460 (revised from Rs470 earlier) based on 1.9x FY21E adjusted PBV and the value of its subsidiaries, implying a FY21 P/ABV of 2.5x. 1 Year Stock Price Performance Note: * CMP as on May 07, 2019 Research Analyst : Mona Khetan Contact : (022) 3303 4634 Email : [email protected]D. Vijiya Rao Contact : (022) 3303 4633 Email : [email protected]Quarterly Performance (Rs mn) 4Q FY19 4Q FY18 % yoy / bps 3Q FY19 % qoq / bps Net Interest Income 76,201 60,217 26.5 68,753 10.8 Other Income - Total 36,210 23,588 53.5 38,829 (6.7) Net Operating Revenue 112,411 83,805 34.1 107,581 4.5 Total Opex 50,077 41,863 19.6 46,117 8.6 Pre Provision Profits 62,334 41,942 48.6 61,464 1.4 Provisions & Contingencies - Total 54,514 66,258 (17.7) 42,442 28.4 Profit Before Tax 7,820 8,882 (12.0) 19,023 (58.9) Reported Profits 9,691 10,200 (5.0) 16,049 (39.6) Source: Company, RSec Research Key Financials (Rs mn) FY19 FY20E FY21E Loan & Advances 5,866,466 6,687,771 7,791,253 NII 270,148 306,861 354,829 PPP ex Except. 234,379 268,952 319,171 Reported Profits 33,634 143,099 191,312 P/E (x) 76.9 18.1 13.5 Adj. BV 137.2 157.9 187.2 P/ABV (x) 2.9 2.5 2.1 Change of Estimates (%) FY20E FY21E Net Operating Revenue (1.3) (1.6) Pre Provision Profits (3.5) (3.9) PAT (8.7) (4.3) Share price (%) 1 mth 3 mth 12 mth Absolute performance 2.8 13.2 41.9 Relative to Nifty 3.3 6.9 32.6 Shareholding Pattern (%) Dec-18 Mar-19 Custodian/DR 24.9 24.9 Institutions 66.7 66.4 Retail 5.6 5.6 NBFC & Bodies Corporate 2.6 2.8 Other 0.2 0.2 Total 100.0 100.0 250 270 290 310 330 350 370 390 410 430 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19
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ICICI BankBFSI | India
Institutional Equity Research
4QFY19 Result Update | May 07, 2019
1
CMP* (Rs) 401
Upside/ (Downside) (%) 15
Bloomberg Ticker ICICIBC IN
Market Cap. (Rs bn) 2,587
Free Float (%) 100
Shares O/S (mn) 6,446
BUYTarget Price: Rs460
High Provisions Impact Earnings; Credit Cost to Moderate
ICICI Bank has reported healthy operating performance in 4QFY19 with NII and core pre-provision operating profit (PPOP) growing by 27% and 49%, respectively, exceeding our estimates. However, its net profit at Rs9.7bn missed our estimate owing to elevated provisioning on ageing of NPA accounts and on recognition of several big-ticket exposures as NPAs (including IL&FS, Jet Airways and a sugar sector exposure). This also resulted in higher quarterly slippages at 2.8% (annualised). Nonetheless, gross NPLs declined by a sharp 110bps QoQ led by higher write-offs of Rs73bn. Margin expanded by 30bps QoQ mainly due to interest on I-T refund (~20bps impact) and sequentially lower interest reversals. CASA deposits grew by a healthy 8% QoQ, with stable CASA ratio sequentially, though quarterly average CASA ratio declined by 150 bps QoQ. At the same time, barring the AMC subsidiary, profitability of most others declined sequentially with ICICI Home Finance reporting a small loss. Going ahead, we expect expansion in RoE to be driven by improving margin and lower credit cost.
Credit Cost to Decline Sharply HereonWith asset quality recognition cycle nearing its end and ageing related provisions having largely played out, we expect credit cost to decline to 1.1% in FY20E against 3.7% in FY19. Sustained decline in concentration risk and increasing share of higher rated corporate loans allude to strengthening of the Bank’s corporate portfolio. Excluding the sugar sector account where payment obligations continue, slippages were better than expectations. Additionally, moderation in ‘BB & Below’ book to 3% of advances gives comfort on incremental corporate slippages.
Healthy Domestic Growth, Rising Retail Share to Aid MarginDomestic loan book grew by 17% YoY with a healthy 22% YoY growth in retail book. Business banking and unsecured loans grew ~40% YoY each albeit on a small base. With strong liability franchise, superior customer outreach across business segments and a healthy capital position, we expect the Bank to continue to grow its retail portfolio which now constitutes 60% of the bank’s advances against 47% three years ago. Improved pricing power and higher share of small-ticket loans are expected to aid the Bank’s margin over FY20-21E.
Outlook & Valuation We believe that the Bank is approaching the end of recognition of stressed loan cycle, which along with improving PCR clearly indicates sharp moderation in credit cost, going forward. Further, the bank’s strong liability franchise with industry best CASA level and healthy capitalisation add to our comfort. Looking ahead, we expect the Bank to deliver sustained improvement across operating metrics led by dwindling headwinds on asset quality front and improving balance sheet. Trimming our earnings estimates to factor slightly higher provisions, we maintain our BUY recommendation on the stock with an SOTP-based Target Price of Rs460 (revised from Rs470 earlier) based on 1.9x FY21E adjusted PBV and the value of its subsidiaries, implying a FY21 P/ABV of 2.5x.
Key Con-call Highlights f Lower-than-expected loan growth.
f Higher-than-expected slippages from corporate portfolio.
f Challenges in corporate recovery.
Conference Call – Key Highlights f Over 90% of disbursements made in FY19 were internally rated A- and above both in
domestic and overseas book.
f Based of regulatory interpretation relating to change in management, a sugar sector exposure was recognised as NPA even though interest payments from the account are regular. The account may not be an immediate upgrade.
f Despite elevated slippages, interest reversals were low as interest payments are regular in one of the larger corporate slippage (sugar exposure).
f As per the RBI’s annual asset quality review, the Bank did not report any material divergence.
f Expecting the NPAs to stabilise, the Management pegs credit cost at 1.2-1.3% for FY20E and consolidated RoE at 15% by Jun’20.
f The Bank has strategically moved to role-based designations from grade-based with a view to empowering the team at local level.
f CASA ratio is expected to decline given the difference in interest rates for TDs and CASA deposits.
f Exposure to Jet Airways (part of ‘BB and below’ portfolio) is classified as NPA in 4QFY19 with adequate provisioning.
f Excluding the impact of one-offs, normalised NIM for FY19 stood at 3.4%, which should improve gradually. Overseas margin could take some time to improve as the book is not growing.
f Slippages from the Kisan credit card portfolio – which constitutes 3% of the Bank’s advances – are expected to be higher in 1Q and 3Q of FY20. Barring this, the retail portfolio continues to witness stable asset quality trends.
Risks to the View f Lower than expected loan growth.
f higher than expected slippages from corporate portfolio; challenges in corporate recovery.
Credit QualityY/E Mar (Rs mn) FY18 FY19 FY20E FY21E
Slippage Ratio (%) 6.2 2.5 2.2 1.6
Gross NPA 540,625 462,916 454,063 423,618
Gross NPAs Ratio (%) 8.8 6.7 5.6 4.2
PCR (%) 48.4 70.7 71.0 72.0
Net NPA 278,863 135,774 131,678 118,613
Net NPAs Ratio (%) 4.8 2.1 2.0 1.5
Capital and Asset-Liability Profile Y/E Mar (%) FY18 FY19 FY20E FY21E
Total RWAs (Rs mn) 6,349,080 6,874,950 7,547,958 8,626,578
RWA as % of Total Assets 72.2 71.3 70.8 70.8
Total Shareholders’ Equity to Assets (x) 11.6 10.6 10.8 10.9
CET 1 Ratio 14.4 13.6 13.7 13.8
AT 1 Ratio 1.5 1.5 1.5 1.4
Tier 1 Ratio 15.9 15.1 15.2 15.2
Tier 2 Ratio 2.5 1.8 1.5 1.2
Total CRAR Ratio 18.4 16.9 16.6 16.4
ICICI BankBFSI | India
Institutional Equity Research
11
CMP (Rs) 401
Upside/ (Downside) (%) 15
Bloomberg Ticker ICICIBC IN
BUYTarget Price: Rs460
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