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Asset quality getting in better shape
* Lower slippages sequentially, higher PCR at 71.5% and lower ‘BB & below book has helped asset quality
* Core PPOP was up by 21% YoY; strong deposits growth of 21% YoY
ICICIBC earnings of Rs19.1bn were much ahead of our estimate (PLe: Rs13.0bn) mainly on lower provisioning as slippages came in lower at Rs27.8bn (1.9% of loans) while PCR improved by 82bps QoQ to 71.5%. Core PPOP continues gain strength with growth of 21% YoY despite slower fee income and on stress side over BB & below is gradually moving down which is currently at 2.5% (from 3.0% in Q4). With pick-up in business with high yielding loan share & lost cost funding should help NIMs improvement, while normalizing credit cost should help strong recovery in earnings. We retain BUY with TP of Rs484 (from Rs475) based on 2.0x Mar-21 ABV & SOTP with risk-reward being favourable.
* Core performance improvement remains on track: NII grew by 27% YoY (25% YoY adjusting for IT refund) with adjusted NIMs coming in flat QoQ at 2.61% (unadjusted down 11bps QoQ). Steady loan growth at 14.5% and loan mix has been helping yields improvement, while cost of funds moved up only marginally despite strong TDs raising. Fee income was slightly slower at 10% YoY but core PPOP growth of 21% YoY was made up better control on opex growth at 18% YoY.
* Higher visibility of stress reduction: Slippages came at Rs27.9bn (1.9% of loans) lower sequentially and with expectations. Slippages from corporate & ‘BB & below’ book were at Rs11.6bn while rest of slippages were from Retail of Rs15.1bn of which Agri were Rs4.52bn, which led to increase in retail NPAs. The risky ‘BB & below’ has come down to Rs156.0bn, down Rs22.0bn sequentially or at 2.5% of loans mainly on some slippage to NPA and higher upgrades of Rs16.2bn to higher rated bucket. Net stress ratios have been coming off and is currently at 4.3% with NPA coverage ratio at 71.5% which is quite adequate to keep credit costs at 130-140bps in FY20.
* Strong growth in deposits; loan growth has been steady: Bank grew its deposits by 21% YoY led by push on TDs growth of 34% YoY & 10.0% QoQ as bank has been highlighting on rate differential with CASA similar to peer banks and hence CASA mix is down to 45.2% from 49.6% QoQ growing only 8% YoY. Average CASA ratio at 43.7% also came off sequentially, growing 12% YoY. On assets, loan growth improved to 14.5% YoY continued to be driven by Retail at 22.5% YoY, while in other segments remains cautious. Retail mix is now 61.4% up by 120bps QoQ with high yielding segments like unsecured, biz loans, CV loans moving up in share.
* Margin of safety remains high: Stock trades at 1.4x FY21 BV with BV & ABV converging on lowering net stress ratios, higher PCR and improving core PPOP, which should lead to bank ROEs improving to 10/12% by FY20/FY21E. Stock remains as one of our preferred picks with better risk reward metrics.
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