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ICICI Bank's Q1FY20 results (Outperformer) - A solid quarter. Hike TP to INR525

Q1FY20 result highlights

• ICBK reported a solid quarter with PAT of INR19bn (our estimate of 15bn) versus loss last year and a growth of 97% qoq. While NII was higher than expected, fees and trading gains were lower. Strong domestic loan growth, stable margins and a substantial improvement in asset quality are the key drivers. Asset quality improved with decline in both GNPAs and the BB portfolio. Most importantly PCR improved to 74% from 70% qoq and is now the highest among all corporate banks.
• Loans grew 14.7% yoy and 1% qoq.  Domestic loan growth accelerated to 18% yoy from14%.  Retail loans continue to grow strongly at 22% yoy (3% qoq) with business banking at 46% yoy, personal loans at 54% and credit cards at 33% while home, vehicle and rural loans grew in high teens. Overseas loans declined 7% yoy and 5% qoq. Mgmt explained that proportion of unsecured loans at 8% is lower than peer banks and delinquencies are also lower than sector levels. So this segment is not a cause of concern for ICBK though some other banks have sounded caution.
• NIM remained strong at 3.61% versus 3.72% qoq / 3.19% yoy. Adjusted for tax refunds and interest on NPLs, NIM was flat qoq at 3.44% versus 3.47% in 4Q. Core domestic NIM declined 10bps qoq as the bank saw a huge growth in retail term deposits while CASA declined, like for the rest of the sector. Term deposits grew 34% yoy / 10% qoq. Quarter-end CASA growth decelerated to 8% yoy. Average CASA growth was higher at 12%. Average CASA ratio declined to 43.4% from 44.6% qoq. Overseas NIM improved 30bps qoq but remains very low at 33bps. NII grew strongly by 27% yoy and 2% qoq.
• Fees grew 10% yoy but declined 4% qoq. Growth in fees moderated due to slower mutual fund distribution fees, excluding which growth was higher at 14%. Trading gains of INR1.8bn were lower than INR8bn yoy. Last year’s figure includes gains on stake sale in life insurance. Total non-interest income declined 11% yoy and 5% qoq due to lower trading gains and dividends. Opex grew 18% yoy. PPOP adj. for trading gains and non-recurring interest grew strongly at 21% yoy / 4% qoq.
• Slippage of INR28bn was lower than 35bn qoq. Retail slippage rose sharply from INR8bn to 15bn due to slippage of INR4.2bn in Kisan credit cards. Corporate slippage declined to INR12.7bn from INR27bn qoq, 90% of which was from BB loans. It includes Jet Airways which slipped in 1Q20 but was provided for in 4Q19. Mgmt sees high farm slippage in 3Q20 and in 1Q21 and 3Q21. GNPAs fell 1% qoq to 6.5%. Credit cost declined to 2.4% from 3.8% qoq. Watch list declined 12% qoq to 2.6% versus 3% qoq.

Valuation and view

With credit cost likely to fall to 1.3% in FY20, higher loan growth, improving asset quality and stable NIMs, we see a sharp turnaround in earnings. We expect RoE of 15% by FY21. Acceleration in earnings, strong CAR and a high PCR will drive the stock’s re-rating. We hike TP to INR525 (2xfair PBV multiple).  Risk-reward is favourable at current valuation of 1.6x P/core book FY21E. Mgmt clarified that there is no immediate plan to raise capital given the bank’s strong CET1 of 13.21%.  Business Standard carried an article that the bank plans to raise INR150bn of equity.