Emkay Global Financial Services has reiterated `Accumulate` on ICICI Bank with a price target of Rs 1,200 as against the current market price (CMP) of Rs 902 in its report dated Jan. 31, 2012. The broking house gave the following rationale:
Inline results; q-o-q improvement in asset quality was a surprise:
ICICI Bank Q3FY12 NII at Rs 27.1 billion was marginally ahead of expectations. The muted growth in non-int income (8% y-o-y) was compensated against stable operating expenses and lower provisioning. GNPA / NNPA at Rs98.2billion / Rs20.8billion declined 3%+ q-o-q each and thereby attributed for lower provisioning. This is against over 6%+ q-o-q increase in GNPA for its peers HDFC Bank (GNPA at Rs20.2billion up 7% q-o-q) and Axis Bank (GNPA at Rs 19 billion up 10% q-o-q). Resultant, net profit at Rs 17.3 billion was up 20% y-o-y (15% q-o-q) and significantly ahead of our / street expectations. Restructured loan portfolio increased to Rs30billion or 1.2% of total loans.
On the balance sheet side:
Loan growth at 19.1% y-o-y (5.2% q-o-q) was largely led by healthy growth in SME and domestic corporate front. Growth in international book was aided by INR depreciation. However, adjusted for the same, growth in international book
was at 16.5% y-o-y. Deposits were up 20% y-o-y and 6% q-o-q. Despite 100bps q-o-q decline in LDR, NIM actually improved 9bps sequentially to 2.7%.
NIMs aided by growth on both international and domestic front:
Q3FY12 NIM at 2.7% (+9bps q-o-q) was aided by strong 20bps q-o-q uptick in international NIM and 6bps increase in domestic NIM. Stable yields on assets with easing cost pressuring compensated for LDR contraction. However, given declining share of retail loans + lending to PSL book in Q4, we expect NIM to ease to 2.6%.
Loan growth at 19% y-o-y driven by SME + domestic corporates book
Q3FY12 loan growth at 19.1% y-o-y (5.2% q-o-q) was largely in the nature of SME (+5.2% q-o-q), domestic corporates (+15% q-o-q). The combined book (SME + domestic corporates) actually grew 24% y-o-y and 13% q-o-q. Demand from domestic corporate has been in the nature of working capital / term loans and broad based across various sectors. Growth on the international book too came in healthy at 38% y-o-y and 4% q-o-q. However, adjusted for INR depreciation, the book actually expanded 17% y-o-y.
… declining share of retail loans remains a bit worrisome:
Unlike its peers (HDFC Bank and Axis Bank) who made remarkable improvement in its retail loan mix during Q3, ICICI Bank (Q,N,C,F)* actually witnessed declining share. Retail loans now account for 33.5% of total loans against 38% in Q3FY11. The bank has been consciously reducing its exposure to risky segments of Personal loans + credit cards which now account for 4% of retail book against 7% in Q3FY11.
CASA mix still healthy at 40% levels:
A 20% y-o-y and 6% q-o-q growth in total deposits was well supported by 18% y-o-y (10% q-o-q) growth in CASA deposits. CASA ratio as at Q3FY12 stood at 43.6%. Adjusting for one-offs in CA account (up 21% q-o-q), CASA ratio actually stood at 39%.
Muted performance on core-fee front; dividend from life insurance: subsidiary came in as rescue:
Non-int income at Rs18.9billion was up mere 8.2% y-o-y (9% q-o-q). Growth in core-fee income continues to remain dismal at mere 5% y-o-y (flat sequentially). The bank management attributed lower fee income to limited M&A activities and syndication business. It has however guided for increasing traction in transaction banking and remittances business and guided for fee income growth in sync with balance sheet growth. Other income at Rs 2.6 billion included Rs 1.5 billion of dividend income from life insurance business for H1FY12. Adjusted for the same, non-inc int would have declined 0.4% y-o-y.
Asset quality improves sequentially…:
GNPA / NNPA at Rs 98.2 billion / Rs 20.8 billion actually declined 3%+ sequentially. This is against its peers (HDFC Bank and Axis Bank) which have reported uptick in NPA. Gross slippages at Rs 8.8 billion remained broad based and constituted 1.4% of total loans. Retail GNPA at Rs 61.7 billion too declined 2% q-o-q.
… however, expect sudden shocks on restructuring front:
During Q3, bank restructured loans to the tune of Rs8.8billion (0.4% of total loans) taking the total o/s. book to Rs 30.7 billion or 1.2% of total loans. The management stated for restructuring across large corporates. It also stated for higher restructuring in Q4 as Rs 13 billion of loans are referred to CDR. Assuming 15-25% NPV loss on the CDR portfolio would account for 4- 7% of net profit for M9FY12.
International subs continue dismal business:
Given tough operating environment, the bank continues with its balance sheet consolidation at the UK subsidiary front. For Q3FY12, balance sheet stood at USD 4.8 billion (USD 5.1billion in Q2FY12 and USD 7.0billion in Q3FY11). With CAR at 29.4%, profit after tax came in at USD 7.7 million (USD 2.2 million in Q2FY12, USD10.9million in Q3FY11). On contrary, Canadian balance sheet moved to CAD 5.3billion with net profit under IFRS at CAD 6.6 million and CAR at 31.6%. The bank has USD 3.2 billion of loans / USD 2.7 billion of liabilities due for re-pricing in FY13.
Domestic subsidiaries report sequential improvement:
Non-banking subsidiaries reported sequential improvement in PAT. Despite challenging business environment, a 10%+ q-o-q growth in ICICI securities, ICICI Prudential AMC, ICICI Home Finance is commendable. ICICI Pru life reported a 2x rise in M9FY12 PAT to Rs10.6billion. It continues to enjoy healthy 6.3% market share in insurance space. The bank reported APE business of Rs 8.6 billion with NBAP margin at 16% and assets under management of Rs632billion (Rs 649 billion in Q2FY12, Rs 663 billion in Q3FY11).
Adequate capital for balance sheet growth; ICICI Bank remains adequately capitalized with CAR at 18.9% including Tier I CAR at 13.1%. Improved loan mix (more in favor of secured loans) and enhanced asset quality has enabled the bank to conserve capital and in-turn suffice balance sheet growth.
Valuations and view:
The clean-up act has started bearing fruits over the past couple of quarters in form of lower NPA accretion, balance sheet growth and in-turn capital conservation. The bank has reported material improvement in its asset quality (including retail GNPA) while holding on to its provisioning requirement. Loan growth too has held up well at 18-19% levels and largely in form of secured assets.
We remain upbeat on the bank given its healthy 1.4% RoA and improving RoE. We expect core - RoE to inch to 15% levels by end-FY13. A sudden spike in restructured portfolio would be compensated by higher provisioning. We expect bank to report 18% / 19% CAGR in net profit / customer assets over FY11-13E. Maintain Accumulate with price target of Rs 1200.
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