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Published on 7/11/2019 1:45:07 PM | Source: HDFC Securtities Ltd

Buy ICICI Bank Ltd For The Target Rs.510 - HDFC securities

Steady (and slow) healing...

 ICICBC’s 2Q was ahead of our estimates. Reported asset quality was stable. The higher influx into the BB and below rated pool disappointed mildly. This was expected, given the spate of downgrades and peer commentary in 1Q. Maintain BUY with an SOTP of Rs 510 (2.0x Sept-21E core ABV of Rs 193 and sub-value of Rs 125).

 

HIGHLIGHTS OF THE QUARTER 

*Asset Quality Stable QoQ: GNPAs were flat QoQ at ~Rs 456bn (~6.4%) with an ~11% QoQ reduction in slippages to ~Rs 24.8bn (1.65% ann.). Both corporate (-9% QoQ, 2.7%) and retail (-11% QoQ, 1.4%) slippages were lower. ~Rs 3.5bn of corp slippages were due to forex fluctuations. Adj. for this, ~56% of corporate slippages were from identified stress. Our slippage assumptions remain mostly unchanged at 1.7%, in spite of the rise in the BB and below rated book, as we built higher slippages in 1Q itself. We have reduced our recovery assumptions, as no material progress on large loan resolutions is seen as yet. 

* Share of Low Rated Corporate Loans Rises: The pool of BB and below rated corporate and SME loans saw a ~5% QoQ increase to ~Rs 161bn (2.6% of loans, albeit down 8.3% since FY19). A combination of a rise in influx (~Rs 21bn) and fall by way of recoveries and upgrades led to this. We are not surprised, given the spate of ratings downgrades. Commentary suggests a higher influx in 2H. The movement of this pool is a key indicator of upcoming stress

* NIMs Expand: While reported NIMs expanded merely 3bps QoQ to 3.64%, adj. for the impact of higher interest on IT refund and interest recognized on recoveries in 1Q, the actual increase was higher (~10bps). This was aided by a sharp 16bps QoQ increase in yields on advances to 9.52% while the CoD fell 2bps QoQ. Despite the strong upward trend in NIMs over the trailing 12 months with a continued increase in the share of higher yielding loans, we conservatively build NIMs of 3.6%, given the uncertainty of the impact of EB-linked loans.

 

STANCE

We continue to like to the structural change in the bank’s B/S (increasing retailisation) and P&L fortification (better margins, lower LLPs due to better coverage). These trends appear sustainable and are likely to persist over the medium term. Our estimates did factor a slight increase in stress in the near term, hence they have not changed significantly. Limited exposure to known stressed names gives us some comfort and we believe the worst in terms of asset quality is long past ICICIBC. Maintain BUY.

 

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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475

 

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