Lack of clarity on stressed accounts will spook ICICI Bank investors, says Suresh Ganapathy of Macquarie Capital Securities. He expects to see a 5-10 percent correction in the stock price at opening on Friday.
Private sector lender ICICI Bank's third quarter profit increased 4.5 percent year-on-year to Rs 3,018 crore, dented by a steep increase in provisions but supported by other income and operating profit. Provisions for bad loans shot up 190 percent year-on-year and 202 percent quarter-on-quarter to Rs 2,844 crore in October-December quarter. Provision coverage ratio as of December 2015 stood at 53.2 percent, the bank said in its filing. Asset quality deteriorated during the quarter with gross non-performing assets (as a percentage of gross advances) climbing to 4.72 percent compared to 3.77 percent in the preceding quarter and 3.4 percent in the year-ago period. Net NPA jumped 63 basis points sequentially and 101 bps year-on-year to 2.28 percent in Q3.
In the near-term, Ganapathy does not see any re-rating catalyst. He believes the fundamental value of ICICI Bank is at Rs 240-250 per share.
Nilesh Parikh of Edelweiss Securities too has cut earnings estimates for ICICI Bank by 17-18 percent. He sees ICICI Bank's return on assets (RoA) at 1.6 percent for FY17.Below is the verbatim transcript of Suresh Ganapathy and Nilesh Parikh's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: You had written a sceptical note on ICICI moved to neutral. What further pain have you realised after the conference call?Ganapathy: We had already factored quite a lot of these hits materialising. If you look at our numbers itself, our overall provisioning numbers over the next two years which we have taken through the profit and loss (P&L) as well as the book value is closer to about Rs 28,000 crore. So we have been pretty conservative and the bank is likely to land up providing about Rs 7,500 crore this particular financial year 2016.So my numbers were already conservative factoring in many of these hits getting materialised and that is what the bank is slowly started recognizing. The problem clearly has been the fact that the management gave a guidance of 90-95 basis points (bps) credit cost at the start of the year, kept on sticking to the guidance and now you have landed up getting 180 bps credit cost for the full year. So it is more than double what the management had guided. That is where the market will get spooked off a bit.Sonia: Also the point that this time around they did mention that the non-performing assets (NPAs) were due to one large metal account but there is also this fear of many other accounts it could blow up in the face in the coming quarters, something like JP Associates etc and that lack of clarity could also perhaps spook investors going forward you think?Ganapathy: That is right. If you look at it, they have already said that the next quarter also the slippages are also going to be somewhat in the similar range of about USD 60 billion that they reported this quarter and they have also clarified that it is going to be some power exposures there which we think or we suspect could be JPA.Having said that, unlike Axis Bank, which gave a clarity as to what is their exposure to the stressed corporate groups, which are highly leverage and how much has been classified as NPA or restructured, unfortunately, ICICI has not come out with such clarifications. So in the absence of any transparency of the balance sheet, I think the stock could remain weak very clearly. Maybe this stock would correct 10 percent on opening but then that would be closer to the bottom with no catalyst for this stock to rerate in the near-term.Latha: What are your expectations in FY17 or is it too uncertain just yet?
Ganapathy: It is definitely very uncertain considering there are several different moving parts and obviously these guys have large corporate exposures where there isn’t much clarity and there could be negative surprises coming out of those large corporate but I have already said at the beginning itself that our total provisioning, which we have taken through our numbers itself is Rs 28,000 crore, which is sufficient to arrive at this particular valuation for ICICI. So to that extent our numbers are protected but then the markets could definitely get jittery in case the numbers are large.Latha: Should you therefore change our view in State Bank of India (SBI)? After all they all lend to the same guys?Ganapathy: I already have sell rating on SBI. So I cannot change it further. Having said that, of course the numbers are going to look very bad across the public sector undertaking (PSUs). Slowly and steadily the PSUs have started reporting losses. Syndicate Bank reported loss yesterday. So if we look at it this quarter and the next quarter is going to be horrible and it is pretty obvious because the total provisioning requirements as per Reserve Bank of India (RBI) over the next two years going by your own flashes in CNBC has been about Rs 1 lakh crore and the total annual profits of PSU banks is around closer to Rs 30,000-35,000 crore. So you can imagine, if they are going to provide Rs 1 lakh crore means two-three years of profits is wiped out.Sonia: What does an ICICI Bank investor do at this point because you said there is no trigger for rerating, forget about that, what about further derating because the stock had fallen well below Rs 200 less than two years ago, if you are an investor in ICICI Bank, what would your advice be?Ganapathy: It is going to be depending upon the horizon. At this price, suppose in case the stock goes down 5-10 percent today, there is no point in panicking and exiting immediately because fundamentally, if you look at it based on our valuation itself after factoring in quite a lot of it, we believe the fundamental value for ICICI could be Rs 240-250. However, then the stocks could trade well below the fundamental value for momentarily maybe for three-six months.If you want to stay invested in banks and if you want to make a good return on the banking stocks for the next six-twelve months , I would recommend the investor to exit ICICI Bank and move on to HDFC Bank.However, if you were to take a slightly longer-term timeframe, two-three years then factoring in some element of economic recovery to happen in India then there is point in exiting ICICI at current price is what I would advise investors.Latha: What is your analysis, at what price would you start touching ICICI?Parikh: We have done a similar exercise that Suresh Ganapathy mentioned that given that there is absence of information in terms of what the exposure to leverage groups could be that Axis has given out plus we have started also equating some of these 5:25, the restructured books assuming a probability of defaults on that number, we are expecting a credit cost was spread over of about Rs 26,000-27,000 crore over next two-three years.So factoring that into account, we have built in numbers and we have said that the earnings we have cut by about 17-18 percent for FY17 and we have stepped up the credit cost to about 185 bps for FY17.So yesterday's numbers gave some indication what is to follow in Q4 also but going forward in FY17 given that you still don’t have a clarity on the exposures on some of these leverage groups and obviously recovery is slow in coming, we will expect some of these non-performing loans (NPLs) to come through but having considered that even after taking a steep cut in earnings, we are coming to an ROA of about 1.6 percent and ROE is in the range of about 13 percent for FY17, which to an extent given where the core business trades at -- the core business adjusting for the subsidiary value.Today one interesting point out here is that the market price of about Rs 233 -- 40 percent of that value is coming from subsidiaries and there is enough confidence in that value given that we have seen some of the deals also fructify at similar valuations. So we are saying that the core business trades at about 0.8 after factoring in some of these stress numbers on credit cost.Taking that into account, current levels obviously the stock will come off today given what they have declared yesterday but I would agree that there is no need to panic. Subsidiary value is there.Sonia: For those investors who are perhaps not comfortable with having an exposure to ICICI Bank, considering that there is lack of clarity on how bad the asset quality could get, for those investors, what would you recommend? Suresh Ganapathy was telling us that he recommends moving out of ICICI Bank and into HDFC Bank, what about you?Parikh: From a pecking order perspective, HDFC Bank obviously would be higher compared to ICICI Bank today because ICICI Bank -- clearly the events have to play out in terms of some of these corporates and the market may not react positively to some of these events of some of the larger corporate slipping into NPLs. On the other side, HDFC Bank given that the retail production continues to be strong and the RBI letter did not have any impact for them, I think has a clean slate going ahead. So from a pecking order perspective, HDFC Bank would be preferred over ICICI.
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