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On a credit-cost normalization path — retain LONG
ICICIBC’s 4QFY19 PAT missed estimates owing to aggressive provisioning (4Q: Rs 54.5bn) even as the bank reported an above-expected PPOP. Management reiterated that the bank is towards the fag end of its clean-up phase, while guiding to FY20 provisions/avg. loans of ~125bps (FY19: ~360bps). With loan growth momentum gaining traction (FY19 domestic/retail loan growth at 17%/22% yoy), a gradual uptick in NIMs (FY20E: 3.5%) and steady opex growth (FY20E: +15% yoy), ICICIBC targets ~15% RoE by Jun’20. We raise NII estimates, tone down fee income/provision expectations and marginally tweak loan growth estimates; this leads to a 4.7%/0.4% increase in FY20E/FY21E PAT. Retain LONG with a SOTP-based Mar’20 TP of Rs 460 (Rs 435 earlier), with the standalone bank valued at Rs 346 (unchanged 2.2x FY20 ABV) and subsidiaries at Rs 114/sh (Rs 97/sh earlier).
Asset quality trending towards a normalized run-rate:
Asset quality is sharply trending towards business as usual. GNPA/NNPA improved to 6.7%/2.1% (-105/-52bps) owing to Rs 73bn of write-offs. Non-retail fresh slippages were primarily from ‘BB and below’ accounts (Rs 18.8bn) and one sugar account worth Rs 8.5bn, which has been servicing loans on time post the management change. The pool of ‘BB & below-rated’ loans now stands at 3.0% vs. 3.3% qoq. Management indicated that slippages and credit costs in retail are below the normalized trend, and that it remains cautious in the KCC portfolio (3% of advances). We currently build in FY20E/FY21E slippages at Rs 111bn/126bn (1.8%/1.7%) with provisions/avg. loans at 145bps/115bps.
Retail loan growth remains strong:
Share of retail loans increased to 60% vs. 59% qoq as (a) retail loan growth remained strong at 22% yoy, (b) the bank continued to scale down its overseas business (-2.2% yoy), (c) provisions on domestic corporate loans kept category growth subdued at 5.7% yoy. Within retail, personal loans/credit cards grew by 49%/31%. Domestic/overall NIMs improved to 4.12%/3.72% (+40bps/32bps qoq) and included ~25bps of gains from interest on IT refunds and interest collection on NPAs. A 25% yoy jump in employee expenses was on account of retiral provisions. Incrementally, management expects (a) FY20 NIMs to be better than FY19’s (3.4%), (b) healthy loan growth and (c) opex growth to be contained at ~15%. We build in FY20E/FY21E loan growth of 16.5%/17.5%, NIMs of 3.5%/3.5% and a C/I ratio of 43%/43%.
Investment thesis & key risks:
With a sharpened focus on risk-calibrated growth, a reducing stressed asset pool, improving NIMs, a good CASA (49.6%) and a healthy tier-1 (15.1%), ICICIBC is well-poised to embark on an improving growth trajectory. A protracted slowdown, an uptick in slippages, non-resolution of stressed assets and adverse regulatory guidelines are key risks to our estimates. We have not incorporated any impact of IND-AS, and one-time provisioning remains a key risk to our FY20E estimates.
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