ICICI BANK: Robust performance; on track to achieve near-term RoE target
(ICICIBC IN, Mkt Cap USD42.7b, CMP INR469, TP INR550, 17% Upside, Buy)
– ICICIBC reported 2QFY20 PAT of INR6.5b (-28% YoY), higher than our estimate of INR4.5b, led by strong NII and other income. Adjusted for the DTA reversal of INR29.2b, PAT would have been INR35.8b. PBT was at INR43.7b (in-line). For 1HFY20, PPoP grew 19% YoY to INR131.6b, while PAT came in at INR25.6b compared to INR7.9b in 1HFY19.
– NII increased 25.6% YoY to INR80.5b, led by 12.6% YoY loan growth and ~15bp QoQ expansion in the core NIM. Other income grew 33% YoY, whereas core fee income increased ~16% YoY to INR34.8b (retail forms 74% of total fees). Total income thus grew 28% YoY to INR122.5b (in-line). Opex increased 24% YoY as the bank incurred higher employee expense (due to higher retiral provisions) and added 346 branches in 2QFY20. PPoP thus grew 31% YoY (core PPoP: +24% YoY).
– Advances grew 12.6% YoY, with the domestic book growing at 16% YoY (~22% YoY growth in retail), while the overseas loan mix declined to 9.8%. Deposit growth was healthy at 24.6% YoY. Despite term deposit growth of 35% YoY, the CASA mix improved to 46.7% from 45.2% in 1QFY20 (120bp decline on an average basis).
– Fresh slippages moderated to INR24.8b, led by a reduction in both retail (INR13.2b) and corporate (11.59b) slippages. GNPL/NNPL ratios thus improved by 10bp/20bp QoQ to 6.4%/1.6%. PCR improved 200bp QoQ to 76.1% (85.0% including TWO). BB and below book increased 5% QoQ to INR160.7b, led by rating downgrade of INR20.7b.
– Other highlights: (a) Retail loan mix increased 70bp QoQ to 62.1%. (b) Cons. performance: ICICIBC reported PAT of INR11.3b v/s INR12.1b in 2QFY19.
– Valuation and view: ICICIBC has delivered a strong operating performance and is showing healthy signs of earnings normalization. We believe the bank is well placed in a challenging macro environment with its limited exposure to the newly surfaced stressed names and one of the highest coverage in the banking sector. However, the continued weakness in the lending environment and the delay in resolutions may pose a risk to earnings revival. We fine tune our earnings and estimate FY21 RoA/RoE improvement to 1.6%/15.7%. Maintain Buy with an SOTP-based TP of INR550 (2.4x FY21E ABV for the bank). ICICI Bank remains our top pick in the sector.