Last Updated : May 08, 2018 02:18 PM IST | Source:

ICICI Bank: De-risking continues; valuations attractive

In the past few years, the bank has steadily diversified and de-risked its asset book while building an enviable liability franchise. With the stock currently trading around 1.1 times FY19e book, current valuations seems to be pricing in the concerns and offers a favourable risk reward.

Neha Dave @nehadave01

ICICI Bank reported a 50 percent year-on-year (YoY) drop in net profit to Rs 1,020 crore for Q4 FY18 as provisions for bad assets more than doubled. The Reserve Bank (RBI) revised its stressed asset recognition framework in Feb 2108 that led to higher slippages. Consequently, provisions increased 129 percent YoY as the bank continued to maintain healthy provision cover of 48.4 percent.

ICICI bank has had a rough run in the past few years with the piling up of bad loans arising out of its corporate exposure. The management has been able to monetise some of its subsidiaries by getting them listed at reasonable valuations, which could provide for rising stress loans. In the past few years, the bank has steadily diversified and de-risked its asset book while building an enviable liability franchise.

Since the asset quality overhang might persist in FY19 and with credit cost remaining elevated, the buffer from both balance sheet (adequate capital) and Profit & Loss (core pre-provision profits) should help the bank mitigate asset quality concerns. With the stock currently trading around 1.1 times FY19e book, current valuations seems to be pricing in the concerns and offers a favourable risk reward.

Quarter at a glance

Despite a 10 percent YoY growth in advances, net interest income (the difference between interest income and expense) was almost flat (up a percent YoY) due to downtick in net interest margin (NIM) and owing to significant interest reversal as a large quantum slipped into non-performing assets (NPAs).

The non-interest income increased 88 percent YoY aided by trading gains, which included Rs 3,480 crore from its 20.8 percent stake sale in ICICI Securities. Fee income growth was healthy at 13 percent driven by retail fees (73 percent of total).

Result snapshot

ICICI Bank financials

Growth in operating expenses was contained at eight percent, though cost-to-income ratio inched up due to lower net income. Pre-provision operating profit (PPoP) was up 47 percent YoY, however, core PPoP (excluding one-off gain from stake sale in subsidiary) was up five percent. The spike in provisions by 129 percent YoY and 86 percent quarter-on-quarter (QoQ) due to higher slippages, while keeping a decent provision cover of 48 percent, resulted in profit de-growth of 50 percent.

Retail remains the loan growth driver; High CASA is a competitive edge

Overall advances growth stood at 10 percent YoY as healthy progress in domestic loan book was partially offset by de-growth in international loans. A strong focus on retail lending has enabled ICICI Bank to grow its domestic loan book by 15 percent YoY, ahead of the system, despite cyclical weakness in the large corporate segment. Retail assets grew 21 percent YoY and now constitutes 57 percent of its total book. The proportion of international in overall loans declined further to 12.6 percent as compared to 24.3 percent as at the end of March 2015.

Performance on the liability side continues to be impressive. Overall deposits grew 14.5 percent YoY led by continued traction in CASA (low cost current and savings accounts) deposits, which grew 18 percent YoY. CASA mix improved 130bps QoQ to 51.7 percent at the end of Q4.

Asset quality pain to persist for a while

Gross slippages to non-performing assets, which was in the range of Rs 4,000-5,000 crore per quarter and on a declining trend for first three quarters of FY18, saw a huge spike to Rs 15,737 crore post RBI’s revised stressed asset directive in February. The bulk of slippages accruing from the existing watch-list was nevertheless comforting.

Gross NPAs to total assets and net NPAs to total assets increased  to 8.8 percent and 4.8 percent, respectively. The management expects asset quality concerns to recede with relatively lesser slippages for FY19.

Target 2020 is in the right direction

The management has articulated its strategy which it endeavours to achieve by June 2020. It aims to deliver consolidated return on equity (RoE) of 15 percent while improving NNPA to 1.5 percent and maintaining provision cover above 70 percent by June 2020.

It would continue its strategy of de-risking the balance sheet growth by increasing the proportion of retail book to 60 percent of the total book versus 57 percent at present while retaining average CASA above 45 percent. We see the bank’s domestic loan growth target of 15 percent as achievable, with retail growth target above 20 percent. The smaller base should enable the 40 percent targeted growth in personal loans and credit cards. The management is targeting 35 percent and 15 percent growth in business banking and mortgages, respectively, to achieve its overall retail targets.

Valuations compelling at current levels

With its 2020 vision in place, investors should expect much lower NPA formation in FY19, normalisation of credit cost by the second half of FY19, mid-teen loan and matching CASA growth, steady interest margin and commencement of the journey to reach RoE of 15 percent. With a strong capital adequacy (Tier I capital ratio at 15.9 percent), we don’t see many constraints in delivering its targets.

ICICI valuations

While asset quality concerns have not completely abated, the risk-reward has turned extremely favourable. With a potential improvement in return rations, the current valuation of its core book at 1.1 times FY19e P/BV looks compelling. In fact, it is trading at significant discount of 30-40 percent relative to its closest corporate lending peer, which is also facing asset quality and management-related issues. The ongoing Videocon loan controversy with respect to its MD and CEO may remain a near-term overhang. Nevertheless, investors should look at the counter as a long-term bet as it is reasonably priced.

For more research articles, visit our Moneycontrol Research page
First Published on May 8, 2018 02:02 pm
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