J.P. Morgan - ICICI Bank

ICICI Bank (ICICIBC IN) 4Q14: Asset quality stable		Overweight Price: Rs1,270.50 25 Apr 2014 Price Target: Rs1,425.00 PT End Date: 31 Mar 2015

ICICI reported in-line 4Q14 PAT of Rs25.6bn, + 15% y/y. The major surprise was an uptick in costs – revenues were largely in line and asset quality remained stable vs 3Q13. ICICI is one of our top picks among India financials – we see the stock as an optimum beta play. The project loan exposure gives it sufficient leverage to a change in macro fundamentals but risks are contained by its balance sheet strengths on capital, funding and loan mix. Valuations are still reasonable compared to history and peers.

Table 1: 4Q14 result table

	4Q13	3Q14	4Q14	YoY	QoQ	Comments
NII	38,032	42,551	43,565	14.5%	2.4%
Non-int inc	22,082	28,010	29,761	34.8%	6.3%	Includes Rs2.2bn on repatriation of profits from overseas branches
Opex	24,073	26,170	28,791	19.6%	10.0%	Employee exp were higher due to provn for variable pay+retirement benefits
PPOP	36,041	44,390	44,535	23.6%	0.3%
Provisions	4,600	6,946	7,138	55.2%	2.8%	Provisions for restructuring were higher during the quarter
PBT	31,441	37,444	37,397	18.9%	-0.1%
Tax	8,400	12,122	10,877	29.5%	-10.3%
PAT	23,041	25,322	26,520	15.1%	4.7%
NIM	3.33%	3.32%	3.35%	0.02%	0.03%	Domestic margins improved by 5bp QoQ
ROA	1.80%	1.75%	1.86%	0.06%	0.11%	Higher revenue and stable provisions led to improvement in ROA
Cost - Income	40.0%	37.1%	39.3%	-0.78%	2.2%
Tax rate	26.7%	32.4%	29.1%	2.37%	-3.3%
Operating ratios
Gross NPAs	96,078	103,991	105,058	9.3%	1.0%
Net NPAs	22,306	31,184	32,980	47.9%	5.8%
Credit cost	0.64%	0.85%	0.85%	0.21%	0.00%
Coverage (%)	76.8%	70.0%	68.6%	-8.2%	-1.4%	Coverage ratio has slipped QoQ
Gross NPA ratio	3.22%	3.05%	3.03%	-0.2%	0.0%
Net NPA ratio	0.77%	0.94%	0.97%	0.2%	0.0%
CRAR	18.7%	17.9%	17.7%	-1.0%	-0.2%
Tier-I	12.8%	12.7%	12.8%	0.0%	0.1%
Tier-II	5.9%	5.3%	4.9%	-1.0%	-0.4%
Balance sheet (Rs bn)
Loans, Rs bn	2,902	3,326	3,387	16.7%	1.8%	Loan growth driven by strong growth in retail loans
- of which retail	1,074	1,221	1,321	23.0%	8.2%
Deposits	2,926	3,170	3,319	13.4%	4.7%
Subsidiaries	4Q13	3Q14	4Q14	YoY	QoQ
Life insurance (Rs bn)
APE	14.9	8.7	10.8	-27.3%	24.5%
NBP	2.22	0.95	1.17	-47.3%	23.2%
NBP Margin (%)	15.0%	10.9%	15.0%	0.0%	4.1%
Stat Profit/Loss	4.01	4.28	3.88	-3.2%	-9.3%
AUMs	741.6	773.9	741.6	0.0%	-4.2%
Expense Ratio	19.2%	18.2%	19.2%	0.0%	1.0%
General insurance
Gross premium (Rsmn)	16,840	17,380	18,360	9.0%	5.6%
PAT(Rsmn)	270	760	760	181.5%	0.0%

Source: J.P. Morgan estimates, Company data.

· Asset quality was stable as delinquencies were flat: 1.5% on NPLs. Credit costs were in line at 85bp for 4Q though PCR marginally slipped. Management believes that the worst is over for asset quality and both NPL formation and restructuring should decline in F15E vs. F14E. We are more cautious and maintain our forecasts of rising credit costs through to F16E, in line with our worries about the macro outlook.

· Revenues stable. a) Loan growth remained stable at 16.7%, with retail driving the growth. The bank continued its traction in key retail areas, with unsecured retail starting to show some upticks off a low base. b) Margins remained stable and we think it could improve in F15E if rates stay elevated, given ICICI’s strong deposit base. CASA ratio was stable at 42.9%. c) Headline non-interest income was strong, but that was primarily due to a lumpy Rs2.2bn transfer from the foreign branches – management mentioned that the reserves are now Rs22bn though not all of it is realizable immediately. Core fee income growth seems to be on a slow recovery path at 14% y/y.

· Opex spike. Both wages and overheads spiked this quarter to drive cost-income up 220bp to 39.3%. This was driven by negative movement in the provisions for retirement benefits as well as an upward revision for variable pay in 4Q14. Management mentioned that the 14% y/y opex growth was more indicative of the trend rate – quarterly data points are likely to be noisy. Even after a 230bp y/y improvement in cost-income, management believes there is scope for improvement.

Table 2: Du pont table

	1Q13	2Q13	3Q13	4Q13	1Q14	2Q14	3Q14	4Q14
Du pont table
NIM	2.78%	2.65%	2.74%	2.97%	2.94%	2.92%	2.94%	3.06%
Fees/Assets	1.65%	1.47%	1.54%	1.60%	1.60%	1.62%	1.63%	1.92%
Operating Expense/Assets	-1.85%	-1.75%	-1.77%	-1.88%	-1.92%	-1.68%	-1.81%	-2.02%
Provisions/Assets	-0.41%	-0.40%	-0.29%	-0.36%	-0.46%	-0.45%	-0.48%	-0.50%
ROA	1.58%	1.54%	1.76%	1.80%	1.75%	1.70%	1.75%	1.86%

Source: J.P. Morgan estimates, Company data.

Figure 1: Credit costs have remained stable

Source: J.P. Morgan estimates, Company data.

Figure 2: Momentum in savings growth continues

Source: Company data.

Figure 3: Overall margins have remained stable

Source: Company data.

 

Investment Thesis

We are OW on the stock, as:

- We expect revenue momentum to remain strong driven by improving margins, robust fee income, and strong retail loan growth. Even with increasing credit costs, we foresee ROEs rising continuously through FY16 to upper teens.

- ICICI has de-risked its loan book in recent years; the quality of the retail book has been resilient as the bank has focused on secured retail loans in last 3-4 years and has cut down on risky retail loans significantly. The infrastructure book is less risky than PSU peers’, given the low exposure to UMPPs and gas projects.

- We believe the bank’s strong capital base is a significant advantage over its competitors (especially PSUs), as they may have to forsake growth to preserve capital.

Valuation

Our Mar-15 PT for ICICI Bank of Rs1,425 is based on a 2-stage Gordon growth model implying 1.7x FY15E book and a Rs223/share valuation for the subsidiaries. Our valuation factors in a cost of equity of 15.4%, normalized ROE of ~20%, and terminal growth of 5%.

Risks to Rating and Price Target

1) Large losses from infrastructure-related exposures. 2) Weak demand from retail loans could affect loan growth in the medium term.

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