ICICI Bank's Q3FY18 results (Outperformer) - Better than expected asset quality

• ICICI Bank’s PAT of Rs16.5bn was lower than our estimate of Rs20bn due to higher provisions, a sharp decline in overseas NIMs and lower trading gains. PAT declined 32% yoy and 20% qoq. While unadjusted profit and operating profit declined, core operating profit grew 10% yoy and 4% qoq. Lower than expected slippages, low divergence and qoq improvement in CASA were the key positive highlights. However a sharp decline of 66bps in overseas NIMs was the key negative. 
• ICICI Bank reported lower than expected slippage of Rs44bn versus Rs47bn qoq. More importantly the bank’s divergence for FY17 was lower than 15% of its reported NPLs as of 31 March 2017 (i.e. lower than Rs64bn) which is why the bank was not required to disclose divergence. We had expected higher divergence of Rs75bn. Also, 83% of the total corporate slippage was from the disclosed stress pool. We believe ICICI’s low divergence is a strong positive relative to other corporate banks like AXIS and YES where there was a sharp increase in slippages following the final divergence report. GNPAs rose 3.5% qoq. Total stress loans now stand at 12.7% of total loans versus 13.3% qoq.
• Of the total slippage of Rs44bn, Rs36bn was corporate slippage. Of this Rs6bn came from the watch list, Rs20bn came from the other disclosed stress pool, Rs1.5bn was from conversion of non-fund to fund while only Rs6bn was outside the disclosed stress pool. The slippage from the drill down list was from promoter entities while slippage from the other disclosed stress pool was Rs12bn from the alternate SDR pool and Rs8bn from the SDR pool. The alternate SDR account that slipped was Renuka Sugars which was part of the international book.
• Domestic NIM declined marginally by 4bps qoq to 3.53%. But overseas NIMs crashed by 66bps to a low 29bps qoq largely due to non-accrual of interest on NPLs. Sequential loan growth was stable at 5% qoq while yoy loan growth accelerated to 10%. Domestic loans grew 16% yoy and 6% qoq led by 22% yoy and 6% qoq growth in retail loans.

Valuation and view: We maintain OP as we believe slippage going ahead will be less volatile than in the previous years and margins have bottomed out. Over the last few quarters, the bank has managed volatility in stress loans better than other private corporate banks. We cut full year earnings to factor in lower 3Q earnings. We raise TP to Rs390 as we revalue non-banking subsidiaries. We value the core business at 1.3x PBV FY20E.