ICICI Bank's Q3FY19 results (Outperformer) - A strong quarter led by overseas NPL recovery

Q3FY19 result highlights

• PAT of Rs16bn was lower than our estimate of Rs18bn growing 77% qoq but declining 3% yoy. NII was higher than expected due to recovery from overseas NPLs (mainly from Essar Global) flowing through interest income. However, credit cost and opex were also higher than expected. The substantial decline in slippage and huge improvement in PCR were the key positive highlights. .
• Loan growth was steady at 11.7% yoy and 3.6% qoq though a bit lower than expected. Retail loans continued to grow 22% yoy and 7% qoq. .The bank bought retail loan portfolio of Rs68bn excluding which retail loan growth would be lower at 19% yoy and 5% qoq. Growth in domestic corporate loans slowed with flat growth yoy and a decline of 2% qoq. 
• Growth in savings was subdued, like it was for the rest of the sector, at 1% qoq/13% yoy. However with strong growth of 18% yoy and 16% qoq in current accounts, overall CASA deposits grew 15% yoy and 6% qoq. Total deposits grew 17% yoy and 9% qoq.
• NIM improved 26bp yoy and 7bp qoq to 3.40%. The NIM improvement was driven by NPL recovery flowing through interest income in the overseas loan book mainly from Essar Oil in our view. That explains why overseas NIM improved substantially from 5bps in 2Q to 77bp in 3Q. Domestic NIM was stable qoq at 3.72%. Ex Essar Oil, NIM would have declined 7-10bps qoq and would have been 18bps lower than the reported NIM of 3.4%. NII grew 21% yoy / 7% qoq.
• Fees grew 16% yoy and 2% qoq while overall non-interest income grew 22.6% yoy and 23.0% qoq. Opex rose sharply by 21% yoy and 7% qoq due to higher actuarial wage provisions. Core PPOP grew 14% yoy and 7% qoq.
• Slippage eased to Rs21bn better than our estimate of Rs24bn and is at a multi-year low. Corporate slippage reduced significantly from Rs23.6bn to Rs10.2bn qoq while retail slippage increased from Rs7.6bn to Rs10.7bn qoq due to higher agri slippage. GNPA declined 5.3% qoq to 7.75%. Credit cost increased 6% qoq and amounted to 3.06% of average loans.  Mgmt guided to credit cost easing from 1Q20.  PCR improved to 68.5% from 59.5% and is the highest amongst banks we cover.

Valuation and view

With improving earnings visibility and inexpensive valuation of 1.5x PBV FY20E for the core bank we reiterate Outperformer. We expect RoE to improve to 17% by FY21E. We are revising our multiple on the core bank to 1.8x from 1.5x as credit cost are likely to peak in 4Q. Our new TP is sRs435.