Bank is implementing various measures that will equip it to successfully progress through the next cycle.
Our meeting with top management of ICICI Bank suggests: (i) Incremental stress asset accretion is limited to 2-3 accounts outside of the drill-down list and some retail stress is emerging due to full impact of loan waiver; (ii) Though the pace of resolution is slow, process of resolving cases under NCLT is progressing well and resolution could gather pace over next 12 months. However, due to stipulated deadline and management change, realisation could be lower than the fair value estimated by banks; and (iii) Management is re-orienting its balance sheet towards lower risk, well balanced and more granular portfolio which coupled with continued run- down in overseas book will keep asset growth soft. Retail franchise remains strong (retail advances grew >18%, retail fees >18%, CASA 50% in Q1FY18), lending comfort. Consequently, we believe the bank’s strong franchise should enable it to deliver above-average normalised returns by FY20E, post uncertainty in the near term. Maintain ‘BUY.
Resolution key, but pace still slow
The trend suggests major part of stress recognition seems to be over—potential stress pool estimated fell to Rs 240 bn in Q1FY18. Key would be resolution/recovery, which remains sluggish. The bank is also implementing management changes (outside SDR) in few cases not included in drill- down list, which may optically reflect rise in overall stress pool. Management highlighted there is no significant incremental risk emerging from telecom and construction sectors. From RBI’s second list, >95% of exposure is already in sub-standard category, though might entail relatively lower coverage and higher provisions.
Outlook and valuations: Strong franchise; maintain ‘BUY’
We believe these are challenging times for corporate banks manifested in temporary moderation in earnings. However, the bank is implementing measures like pruning concentration risk, targeting better rated credit mix on incremental lending and strengthening credit monitoring that will equip it to successfully progress through the next cycle. At CMP, the stock is trading at 1.0x FY19E P/ABV. Maintain ‘BUY/SO’ with SoTP of Rs 362. Answers to questions put forth to ICICI Bank’s management
ICICI Bank has an exposure of Rs 72.4 bn to 9 of the accounts (advised by RBI) referred to NCLT on which it carries provisioning coverage of 41% and will require additional provision of Rs 6.47 bn over next 3 quarters to reach 50%. However, depending on its resolution plan and committed bids from potential buyers, incremental hit (if any) would be taken as and when the resolution plan is accepted by IRP and committee of creditors. Given the stipulated deadline and management change, there is a likelihood of realisation in few accounts being lower than the fair value estimated by banks.
Retail slippages rose in Q1FY18 largely due to stress pertaining to demonetisation (of the Rs 2.23 bn portfolio impacted a large part slipped into NPLs). However, entire impact of farm loan waivers was not fully reflected in the first quarter, and in Q2FY18 too stress in retail loans is expected to be high.
