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ICICI Bank's Q3FY20 results (Outperformer) - Strong in a tough environment

Q3FY20 result highlights

• ICICI Bank delivered strong operating performance in a tough environment. PAT of Rs41.5bn grew 158% yoy and 533% qoq driven by recovery income of Rs21bn from Essar Steel. Healthy loan growth, higher core NIM, strong fee growth and healthy CASA were the key positive highlights. Slippage was higher qoq but still lower than other large banks. Increase in BB was lower than that for AXIS in absolute terms.
• Loans grew 13% yoy and 4% qoq.  Domestic loans grew 16% yoy while overseas loans declined by 16%.  Retail loans continue to grow strongly at 19% yoy (4% qoq) with business banking at 47% yoy, personal loans at 51% and credit cards at 43% while home and rural loans grew in high teens.
• Reported NIM grew 13bps qoq to 3.77%. Even after adjusting for tax refunds and NPL recovery, core NIM expanded by 11 bps to 3.66% versus 3.55% qoq. The sequential NIM expansion was driven by a reduction of 13bps in the cost of funds. Both average and quarter-end CASA growth accelerated qoq. Quarter-end CASA growth accelerated to 12% from 8% while average CASA growth improved from 12% to 15%. Average CASA ratio improved 60bps qoq to 42.8%.
• Core fee growth rebounded to 17% yoy (3% qoq) from 10% in 2Q. Trading gains rose qoq from Rs3.4bn to Rs5.3bn. Total non-int income grew 18% yoy and 9% qoq. Opex grew 21% yoy/4% qoq. Employee expenses declined qoq due to write back of actuarial provisions.
• Core PPOP grew 24% yoy /7% qoq. Credit cost fell to 1.3% from 1.7% due to the recovery of Essar Steel. The bank has fully provided for Karvy in 3Q itself.
• Slippage rose from Rs25bn to Rs43.6bn due to the slippage of Karvy and a South based group (could be Sanmar). Total corporate slippage was Rs24.7bn of which Rs7bn slipped from the watchlist while slippage outside the watch list of Rs17bn was from Karvy and a South based group (Sanmar). The slippage ratio rose from 1.8% to 3.1% qoq but is still lower than other large banks. Retail slippage rose qoq due to higher farm and CV slippages. While slippage rose, recoveries also rose sharply driven by Essar/Ruchi Soya. GNPAs fell 5% qoq while NNPAs fell 5% qoq and PCR remained stable qoq at 76.1%. There were gross additions of Rs27bn to the watch list of which Voda Idea was Rs17bn. On a net basis, watch list rose 8% qoq to Rs174bn / 1.5%.
• As resolutions of a few NPLs will spill to FY21 from 4QFY20, management has revised full year credit cost guidance from 1.3% to 1.8%.

Valuation and view:

While slippage and additions to BB were higher qoq, ICICI’s earnings were stronger than other banks on slippage, NIMs, fees, PCR and gross additions to BB. With management’s guidance of higher credit cost for 4Q we cut our earnings. We believe ICICI Bank is best positioned to normalize credit cost and earnings faster than other corporate banks. We forecast RoE of 15% in FY21. We reiterate our Outperformer rating on ICICI Bank. Acceleration in earnings, strong CAR and a high PCR will drive the stock’s re-rating. Management has clarified that there is no plan to raise equity. With consistent improvement in operating metrics over the last few quarters in a tough macro, we revise our target multiple on the core bank to 2.5x FY21E and our TP to Rs600.