ICICI Bank's Q4FY19 results (Outperformer) - One-off slippage but no doubt that earnings will turnaround from FY20

Q4FY19 result highlights

• PAT of Rs9.7bn was lower than our estimate of Rs17bn due to higher ageing provisions. Increase in PCR to 71%, the highest amongst corporate banks, a substantial 10% reduction in NPLs and a 22 bps qoq improvement in core NIMs are the key positives. Net NPLs are down to 2.06% versus 4.9% yoy – a big improvement and now same as AXIS Bank’s, against a historical difference of over 150bps. On the negative side 1) slippage was higher than expected due to the bank having to classify Shree Renuka Sugars as NPL even though it is performing and 2) NII had lumpy income amounting to 7% of total.
• Loan growth improved to 14% yoy from 12% in 3Q.  Domestic loans grew 14% yoy and 4% qoq with retail growing 22% yoy and 6% qoq.  Overseas loans declined 2% yoy and 6% qoq.
• NIM improved substantially by 30bps qoq to 3.72%. Tax refunds contributed 20bps to total NIMs while domestic NPL recoveries around 5bps taking the total lumpy contribution to NIMs at 25bps in 4Q from 18bps in 3Q. Even excluding lumpy income, core NIM improved from 3.22% to 3.47% qoq led by better yields. NII grew 27% yoy and 11% qoq.
• Fees grew 15% yoy and 4% qoq while overall non-interest income declined 36% yoy and 7% qoq due to lower profit on sale of investments. Opex rose sharply by 20% yoy and 9% qoq for a second quarter in a row due to retirement benefits. Mgmt explained that the full year opex growth of 15% is a good reference point for future. Core PPOP ex one-off NII and trading gains, grew 20% yoy and 5% qoq.
• Slippage rose qoq to Rs36bn from Rs20bn. Excluding Shree Renuka Sugars of Rs8.5bn and IL&FS of Rs2.8bn, slippage would have been lower at Rs25bn and in line with estimates. While Shree Renuka Sugars is meeting its payment obligations, the bank had to classify it as NPL because the RBI does not treat existing shareholder Wilmar taking a higher stake in the company as change of management. The bank is still earning income on the asset so the NPL classification is not a cause for concern. While Jet is not NPL, it is part of the BB portfolio and has been adequately provided for. Despite a rise in slippage, GNPAs fell 10% qoq due to huge write-offs. The BB portfolio has declined 7% qoq to 2.5% of loans. Overall stress loans fell from 11.1% to 9.7% qoq.  PCR has improved to 71% from 69% qoq, the highest among corporate banks we cover. Credit cost rose to 3.8% from 3.1% qoq due to higher ageing provisions.

Valuation and view

With credit cost likely to fall to 1.3% in FY20 and 1% longer term (from 3.8% in 4Q19), loan growth picking up and improvement in annual NIMs, we see a big turnaround in earnings. We expect RoE of 15% by FY21 which could go higher if credit cost falls further. Acceleration in earnings, strong CAR and a high PCR with adequate provisions even on non-fund exposures will drive the stock’s re-rating. We hike TP to Rs475.  Risk-reward remains very favourable at current valuations of 1.5x P/core book FY21E.