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ICICI Bank's Q2FY20 results (Outperformer) - A solid quarter

Q2FY20 result highlights

• ICBK reported a solid quarter. While PAT of Rs6.5bn declined yoy and qoq, that was largely on account of mark-down of deferred tax assets resulting in a negative charge of Rs29.2bn. Ex DTA, PAT of Rs35bn grew 28% qoq and 3x yoy. Operating performance was strong driven by strong retail loan growth, pick up in fees, higher NIMs and lower credit cost.
• Loans grew 13% yoy and 3.5% qoq.  Domestic loan growth was strong at 16% yoy.  Retail loans continue to grow strongly at 22% yoy (5% qoq) with business banking at 46% yoy, personal loans at 51% and credit cards at 40% while home, vehicle and rural loans grew in high teens. SME loans grew 30% yoy while domestic corporate loans grew 3%. Overseas loans declined 13% yoy.
• NIM remained strong at 3.64% versus 3.61% qoq / 3.33% yoy. Adjusted for tax refunds and interest on NPLs, NIM improved 10bps qoq. Domestic NIM remained flat qoq at 3.92% while overseas NIM improved 8bps qoq but remained low at 41bps.  Average CASA deposits grew 11% yoy while term deposits grew 35%.  NII grew 26% yoy and 4% qoq.
• Fee growth accelerated to 16% yoy / 14% qoq from 10% in 1Q. Trading gains were higher at Rs3.4bn versus 1.8bn qoq and a loss of Rs345M yoy. Opex grew 24% yoy. Adjusted for higher actuarial provisions, opex grew 20% yoy driven by the addition of 360 branches yoy. Core PPOP grew strongly at 23% yoy / 10% qoq.
• Slippage declined qoq from Rs28bn to Rs24.8bn. Corporate/SME slippage fell from 12.7bn to 11.6bn while retail fell from 15bn to 13bn. Within corporate/SME slippage, fresh slippage excluding exchange depreciation and debits to existing NPLs was 6.6bn of which Rs2.9bn was from BB and below pool of accounts less than Rs1bn, and 3.7bn was outside the watch list. Addition to NPLs due to currency depreciation was 3.5bn. GNPAs remained flat qoq with the GNPA ratio at 6.37%. PCR ex write-offs stood at 76%, amongst the highest in the sector. 
• Credit cost fell qoq to 1.7% from 2.4% and is expected to fall further. Mgmt maintains its guidance of credit cost falling to 1.2% for FY20 which also includes recoveries from existing NPLs mainly Essar Steel. Credit cost and asset quality are playing out as per management guidance. Mgmt had guided that credit cost would peak in 1Q20.
• The BB pool grew 5% qoq to Rs161bn. There were additions of Rs21bn to the pool mainly from infra/EPC. BB accounts for 1.4% of the bank’s total exposure of Rs11.6trn. Telecom accounts for 1.8% (Rs200bn) of total exposure where the bank has exposure to the top two companies. The MCA shows a charge created by the bank on Vodafone Idea’s assets for Rs17bn. The bank does not have any material exposure to HFCs that are perceived to be risky. Mgmt does not rule out further additions to BB. Mgmt clarified that they have taken over the servicing of pools they bought from DHFL and the pools remain well rated.

Valuation and view

With credit cost likely to fall to 1.2% in FY20, higher loan growth, improving asset quality and stable NIMs, we see a sharp turnaround in earnings. We expect standalone RoE of 15% by FY21. Mgmt has reiterated consolidated RoE guidance of 15% by June 2020 (versus 4% in 2Q). Acceleration in earnings, strong CAR and a high PCR will drive the stock’s re-rating. While management has guided that the BB book could increase, ICICI Bank’s name does not figure as a lender to most of the companies that have been downgraded since April, which is comforting. We cut FY20 earnings to account for DTA markdown, higher opex, higher NIMs and higher fees. We also tweaked our earnings for FY21E. We are marginally increasing our TP to Rs550 from Rs525 as we increase our core PBV multiple to 2.2x from 2x earlier.