Buy ICICI Bank; target of Rs 395: KRChoksey

KRChoksey's research report on ICICI Bank

ICICI Bank has posted an improved quarter with advances growth of 6.3% yoy, prudent provisioning and gross NPAs declining by 12 bps qoq to 7.87% (net NPAs at 4.43% vs. 4.86% for Q1FY18). Total interest income for the quarter came in at Rs. 135771 mn, up 1% qoq, down -0.5% yoy on back of volatile NIMs impacted by collection from NPAs. Slight improvement in NIMs (because of collections from NPA and improved CASA), has helped NII expand by 8.7% on yoy and 2.1% qoq. Non-interest income during the quarter was impacted by gains on ICICI Lombard stake sale amounting to Rs. 20121.5 mn. Apart from this, fee income grew by 9.1%. During Q2FY17, the bank has sold stake in ICICI Prudential Life Insurance which resulted in a gain of Rs. 56820 mn. Hence, performance on the total income as reported may not be comparable. Credit costs continued to be elevated for the quarter at 2.7% (against 1.6% for Q1FY18) on account of prudent provisioning carried out by the bank, resulting in continued subdued profitability with PAT at Rs. 20.582 mn, de-growing 33.7% yoy and up 0.4% qoq. On the asset quality front, fresh slippages were down to Rs. 46740 mn, which brought fresh slippage ratio down to 4.4% against 4.7% for Q1FY18.

Outlook

While earnings continue to deteriorate (PAT down 33.7% yoy, up only 0.4%), we take comfort in the fact that asset quality has shown signs of improvement over the last 2 quarters with slippages declining for the 8^th consecutive quarter (slippage at 4.4% vs 4.7% in Q1FY18). Further the management has guided for FY18 slippages to be significantly lower than that of FY17. Along with this, we also like how prudent the bank has been in providing for the NCLT-related stress upfront by utilizing stake sale gains. Although slippages have reduced in recent times, we will continue to monitor asset quality divergence. We also continue to maintain our cautious stance on the asset quality on account of drill down list while we expect earnings to continue to be impacted by provisioning requirements of the 2^nd NCLT list plus any slippages to NPA that may happen from the drilldown list. Over the medium-to-longer term, we believe that the management’s strategy to lend only to better rated corporate and retail focus will help the bank improve on its asset quality gradually over the years while advances are expected to resume their growth trajectory along with stable NIMs (of +3%). Bank’s subsidiaries (especially the insurance ones) are expected to create significant value in the long term as well. We therefore continue to value the bank at 1.9x FY19E ABVPS and we value the subsidiaries at Rs. 104 per share, thus arriving at a SOTP value of Rs. 395 per share, which offers an upside of 30% from current levels. We maintain our rating at BUY.

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