15 June 2015

ICICI Bank - Retail Business Standing Tall; Lumpy Exposures Holds Key;:: Edelweiss

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We present key takeaways of our interaction with ICICI Bank’s top management along with our read across the bank’s FY15 annual report (AR). While management took cognizance of the few lumpy exposures that are a concern, given adequate asset cover and tier-1 it expects ultimate loss to be well guarded. Further, it maintained guidance of incremental stress in FY16 being lower than FY15, though stress could be more front-loaded in H1FY16. Key takeaways from FY15 AR: 1) digital banking initiatives have been a focus area which will provide operating leverage in medium term; 2) lumpiness seen in FY15 NPLs (top-4 NPLs accounted for INR62bn versus INR17bn in FY14); and 3) retail business remained impressive also helping it  bridge  return on RWA (RoRWA) gap with peers. Despite noise surrounding asset quality issues in corporate book, the bank continues to tread strong on retail front. Multiple levers of RoRWA expansion, triggers from non-banking subsidiaries and current banking business valuations of 1.4x FY17E render favourable risk-reward.
Stress high in FY15, NPLs from restructured book key monitorable 
Analysing the stress in FY15 suggests that chunky exposure in shipping, infra (ex-power), steel and non-finance services contributed largely to incremental stress. Bank expects asset quality concerns to wane from H2FY16, not only driven by improving macros but also by management action of sale of few assets and legal action against few.
Retail going strong, wholesale drags overall earnings
Retail business continued to outperform feeding into lower RWA growth (credit risk to loans plus investments declined in FY15) inturn aiding them bridge RoRWA gap with peers (albeit still lot of scope for improvement). On the other hand profitability of wholesale banking continued to a drag - over past 4 years PBT has been flattish following higher credit costs and slower corporate credit growth and muted fee.


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