ICICI Bank - Weakening asset quality - Phillip Capital

Increasing stress on asset quality coupled with earnings slow down (on DTL provision), marred the quarterly performance. The management commentary indicates more asset quality stress in subsequent quarters. In terms of earnings, NII growth remained largely stable but traction in non interest income (driven by treasury gain & dividend income) translated into strong pre-provision profit growth. However due to higher tax incidence (as the bank created DTL on special reserve U/S 36 I (viii) for current year), the earnings growth moderated to 12.5%. The bank also netted DTL amounting to Rs14.2bn on outstanding provision against reserve. Asset quality showed stress with fresh accretion to stressed assets of Rs 32.7 bn (Rs12.3bn of slippage & Rs20.5bn of fresh restructuring) and credit costs (annualized) of 85 bps.

Key highlights for Q3FY14

- NII increased by 21.6% YoY to Rs 42.5 bn driven by NIM expansion YoY. On a QoQ basis, NIM remained flat at 3.32% QoQ driven by increase in yield on fund and equivalent rise in cost of fund. Domestic NIMs improved by 2 bps QoQ to 3.67% while international NIMs declined by 10 bps to 1.7% due to bond issue expenses amounting to USD750mn.

- Advances growth 16% YoY (domestic 13% & overseas 24%) due to cautious approach on domestic corporate lending (+7% YoY) and rundowns in the commercial vehicle segment (-17.6% YoY). Retail loans continued to be the major growth driver (+22% YoY) with strong growth seen in mortgages and auto loans. Overseas growth of 24% is partially on account of rupee depreciation and partially driven by loan against FCNR (B) in foreign branch. Deposits growth was only 10.7% YoY owing to reduction in wholesale term deposits. However, CASA growth was strong resulting in CASA (daily average basis) increasing to 39% (40.3% as on Q2FY14).

- Due to MTM reversal on bond and profit booking in equity, treasury reported strong gain of Rs4.5bn. However, fee income of 12.8% YoY was driven by strong growth in retail. The management has guided for 14% YoY growth in fee income for FY14E driven by continued traction in retail fees.

- Operating growth of 15.7% YoY was driven by opex towards branch addition and underwriting cost of retail asset. Consequently, Cost/Income (excl treasury) increased from 37% in Q2FY14 to 39.6% in Q3FY14.

- Asset quality deteriorated with slippages remaining elevated at Rs 12.3 bn (Rs 11.45 bn in Q2FY14) which coupled with lower recoveries (Rs 3.6 bn) and write offs (Rs5bn) resulted in GNPAs at 3.05% (3.08% as on Q2FY14). Large part of the slippages was driven by corporate and commercial segment. PCR declined by 300 bps to 70%. The bank restructured loans worth Rs 20.5 bn and has indicated for a CDR restructuring pipeline of Rs 30 bn with an upward bias.

Outlook and valuation

The bank is reaping benefits of its strong retail franchise which is enabling a strong retail assets growth and traction in fee income. Management has guided for a moderate balance growth and stable NIM of 3.3% for FY14E. The earnings growth to witness tailwinds given moderate topline, limited operating leverage and higher credit cost. We believe that the negative outlook on asset quality by the management in near term may limit the stock to a trading range. We expect earnings growth to slow down to ~11% over FY14-15E translating into RoAs of 1.8%. At the CMP, ICICI Bank trades at 1.4x FY15E core Adj BV of Rs554 (considering Rs 203/share for subsidiaries). We maintain Buy with a PT of Rs 1172 valuing the core banking business at 1.75x FY15E Adj BV.

Source : Equity Bulls

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