ICICI Bank's Q2FY19 results (Outperformer) - Turnaround quarter

Q2FY19 result highlights

• ICICI’s PAT of Rs9.1bn in 2QFY19 vs a loss in 1QFY19 was below our estimate but higher than the consensus estimate of Rs8bn. We believe this is an above average quarter with higher NIMs, steady CASA, higher provisioning cover and decline in total stress loans.  We also believe this quarter marks the turnaround for ICBK and expect profitability to improve with further moderation in credit cost, NCLT recoveries and higher loan growth.
• Loans grew 13% yoy and 5.5% qoq driven by retail growth of 20%, SME growth of 20% and corporate growth of 5%. Overseas loans declined 4% yoy. Within retail, while housing and vehicle loans grew in the mid-teens, business banking and unsecured personal loans grew faster at 45% yoy and 51% yoy.
• NIM improved by 14bp qoq to 3.33% with domestic NIMs of 3.71% expanding by 17bps while international margins crashed to a low 5 bp. The domestic NIM expansion was on a high base of 1Q that included recovery income from NCLT resolutions. NIM expansion was driven by a higher CD ratio, better loan mix, lagged MCLR repricing and stable cost of funds. Mgmt expects NIMs to decline in 2H due to rise in cost of funds. NII grew 12% yoy and 5% qoq.
• Slippage of Rs31bn was lower than Rs40bn qoq – the third consecutive quarter of decline. More importantly, almost the entire fresh corporate slippage of Rs10bn was from the BB pool unlike last quarter where slippage outside the disclosed stress pool was high. Addition to existing NPLs of Rs13bn due to exchange depreciation was higher than Rs10bn qoq.  GNPAs rose 2% qoq to 8.54% of loans from 8.81% in 1QFY19. The bank sold NPLs worth Rs7bn for 100% cash in 2Q. Size of the BB pool declined sequentially as upgrades overpowered downgrades. JSPL was the key account upgraded for Rs18bn. Among the accounts that slipped to the BB and below pool, IL&FS and power loans were the key contributors. Overall stress loans declined 4% qoq to 12.5%.

Valuation and view

With consistent reduction in slippages, declining credit cost and revival in core PPOP, we believe ICBK’s earnings are turning around. With other private banks having either large IL&FS exposure or management transitions or issues around divergence, we believe their rich premiums to ICBK will narrow. With earnings having bottomed, management transition complete and low incremental stress for ICBK, we believe the stock is set for a rerating, We upgrade the target multiple to 1.5x (from 1.3x) and our TP to Rs390 based on FY20BV.