ICICI Bank BUY RESULTS REVIEW 4QFY17 04 MAY Highlights of the quarter. CMP (as on 3 May 2017) Rs 273 Target Price Rs 345

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1 INDUSTRY BANKS CMP (as on 3 May 2017) Rs 273 Target Price Rs 345 Nifty 9,312 Sensex 29,895 KEY STOCK DATA Bloomberg ICICIBC IN No. of Shares (mn) 5,825 MCap (Rs bn) / ($ mn) 1,587/24,768 6m avg traded value (Rs mn) 4,892 STOCK PERFORMANCE (%) 52 Week high / low Rs 298/213 3M 6M 12M Absolute (%) (3.1) Relative (%) (9.0) (7.9) 4.9 SHAREHOLDING PATTERN (%) Promoters - FIs & Local MFs FPIs Public & Others Source : BSE Darpin Shah darpin.shah@hdfcsec.com Pranav Gupta pranav.gupta@hdfcsec.com Hits > misses ICICIBC s results were a pleasant surprise, with (1) A sharp drop in net stressed assets, (2) Healthy domestic loan growth at 14%, led by retail, (3) NIM improvement, (4) Controlled opex (+2% QoQ), (5) Sustained momentum in CASA and (6) In-line net earnings, despite reversals of Rs 2.9bn towards foreign currency translation gains. However, the bank utilised contingent provisions of Rs 15.3bn during the quarter. While slippages were elevated, we note that it includes an exposure of Rs 54bn to one large cement company. Excl. this, slippages were lower at ~16% QoQ. We have tweaked our estimates to factor in betterthan-estimated NIM, an improved loan trajectory, healthy CASA and a sharp drop in the watchlist. We believe that chunky corporate exposures will continue to haunt the bank in the near term. However, we remain admirers of ICICIBC s rising granularity in the B/S and P&L (fees), healthy capital RESULTS REVIEW 04 MAY 2017 ICICI Bank BUY position and expected value unlocking in subs. Maintain BUY with a SOTP of Rs 345 (1.75x Mar-19E ABV of Rs Rs 89 from subs). Highlights of the quarter Elevated slippages, net stressed assets dip: Elevated slippages (Rs 113bn, 9.8% annu.) were led by downgrades of Rs 80bn (incl. one cement exposure) from the watchlist, and relapse of Rs 18bn. However, the net stressed book (NPA + Rest+ Watchlist) declined 10% QoQ to Rs 488bn (10.5% vs. 11.8% QoQ). Our slippages assumption of avg. 3.65% over -19E provides an upside risk, given the small proportion of the restructured book and sharp drop in the watchlist. NIM uptick is a positive surprise: Sequential NIM improvement (3.6%, +45bps) was led by a sharp drop in CoF (24bps QoQ), int. on tax refund (Rs 2bn), and interest recoveries in NPA exposures (12-13bps), despite higher slippages. With expected yield pressure (higher slippages and shift to MCLR-linked loans), we have factored in NIMs at 3.3% over -19E. Financial Summary (Rs bn) YoY (%) QoQ (%) P FY18E FY19E Net Interest Income % % PPOP % % PAT % % EPS (Rs) % % Core ROAE (%) Core ROAA (%) Adj. BVPS (Rs) P/ABV (x)# P/E (x)# ; Note : # adjusted for embedded value of subs HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

2 ICICI BANK : RESULTS REVIEW Watch-list Exposure Rs bn QoQ (%) Power 62.3 (25.4) Iron/Steel 39.7 (11.5) Cement 2.9 (94.8) Rigs 0.4 (4.4) Promoter entity 32.7 (4.5) Total watch-list (30.9) Movement In Watch-list Rs bn Opening Reduction Slippage Closing Sequentially higher slippages led by large exposures: Gross additions remain elevated, with slippages of Rs 113bn (9.8% vs. 6.2% annu.) as it incl. downgrades of Rs 79.6bn from the watchlist (Rs 53.8bn from one large cement exposure) and relapse of Rs 18bn. However, the retail slippages were stable QoQ at Rs 4.4bn. While the cement exposure is downgraded to NPA, the management hinted at partial (~50%) upgrades in the coming quarters (with most of the regulatory clearance already in place). While NNPA jumped 26% QoQ to Rs 254bn, the net impaired assets (NNPA + restructured book), along with the watch-list declined ~10% QoQ (20% ) to Rs 488bn (i.e.10.5% vs. 11.8% of loans and 15.1% in ). We have conservatively factored in slippages at avg. 3.65% over -19E, despite a small restructured book and sharp drop in the watchlist, which provide an upside to our estimates. Superior liability franchise: Led by healthy SA growth of 28/4% YoY/QoQ and CA growth of 27/13%, the CASA ratio improved 50bps QoQ (after 410bps QoQ in ) to 50.4%. On an avg. daily basis, CASA ratio improved 170bps (after 330bps QoQ in ) to 46.5%. Uptick in NIMs, a positive surprise: Despite higher slippages, NIMs improved ~45bps QoQ to 3.57%. The sharp NIM improvement was led by (1) Interest on tax refund of Rs 2bn and (2) Recovery in NPA exposures (12-13bps impact) and (3) A sharp drop of 24bps in CoF. Domestic NIM improved 45bps QoQ to 3.96%, and foreign NIM improved 18bps QoQ 1.0%. Shift from base rate to MLCR-linked loans, drop in MCLR rates and relatively elevated slippages will keep yields under pressure. However, an increased share of domestic loans and drop in CoF will provide a cushion to margins. We estimate NIMs at 3.3% in E/FY18E. Healthy domestic growth led by retail: The overall loan growth was muted at 7% YoY (+1.5% QoQ) and attributed to a sharp (21/10% YoY/QoQ) drop in the overseas book (Rs 747bn, 16% of loans, -200bps). Domestic loans grew ~14/4% YoY/QoQ led by sustained momentum in retail loans (~18/8% YoY/QoQ, 51.8% of total loans, +290bps QoQ). Subdued performance in Corp loans continued, with a tepid growth of 6% YoY (-3% QoQ). Among the Retail loans, growth is encouragingly broad-based, led by unsecured businesses like PL, CC (on a smaller base), along with rural and business loans. We have factored loan CAGR of 15% over in - 19E. Other highlights: ICICIBC declared a bonus in the ratio of 1:10 i.e. one share for every ten shares. Page 2

3 ICICI BANK : RESULTS REVIEW SOTP Rs bn Per Share Rationale ICICI Bank 1, x Mar-19E Core ABV of Rs 146 ICICI Life Insurance x Mar-19 EV ICICI General Insurance x FY19E PAT ICICI AMC % of FY19E AUM ICICI UK x FY19E BV ICICI Canada x FY19E BV ICICI Housing Finance x FY19E ABV ICICI Sec x FY19E PAT Others 15 3 I Ventures and others Total Value Of Subsidiaries Less: 20% Holdco Discount Net Value Of Subsidiaries Total Value 1, Current Value 1, Upside (%) Source: HDFC sec Inst Research; Page 3

4 ICICI BANK : RESULTS REVIEW Five Quarters At A Glance Rs bn YoY Growth QoQ Growth Net Interest Income % 11.2% Non-interest Income % -23.4% Treasury Income % -43.7% Operating Income % -3.5% Operating Expenses % 2.4% Pre Provision Profits (PPoP) % -7.5% Provisions And Contingencies % 6.8% PBT % -21.3% Provision For Tax (5.2) NA -48.8% PAT % -17.1% Balance Sheet items/ratios Deposits 4,214 4,241 4,491 4,653 4, % 5.3% CASA Deposits 1,931 1,913 2,052 2,320 2, % 6.4% Advances 4,353 4,494 4,543 4,575 4, % 1.5% CD Ratio (%) bps -359 bps CAR (%) bps 66 bps Tier I (%) bps 103 bps Profitability Yield On Funds (%) bps 21 bps Cost Of Funds (%) bps -24 bps NIM (%) bps 45 bps Cost-Income Ratio (%) bps 246 bps Tax Rate (%) (287.2) NA -460 bps Asset quality Gross NPA (Rs bn) % 11.7% Net NPA (Rs bn) % 26.3% Gross NPAs (%) bps 69 bps Net NPAs (%) bps 93 bps Delinquency ratio (%) bps 362 bps Coverage Ratio (%) bps -689 bps Restructuring O/s (%) bps -48 bps Change In Estimates (Rs bn) FY18E FY19E Old New Change Old New Change NII % % PPOP % % PAT % % Adj. BVPS (Rs) % % Source: HDFC sec Inst Research Inc. Rs 2bn interest on tax refund and interest recovery in NPA (12-13bps); 9% ahead of estimates Reversed Rs 2.9bn towards foreign currency translation gains. Fees grew ~11% led by retail fees (+16%); 70% of total fees Utilised contingent provisions of Rs 15.3bn CASA ratio +50bps (after +410bps QoQ in 3) at ~50.4%; Avg CASA ratio up 170bps QoQ (after 330bps QoQ in ) to 46.5% Domestic loans +14% were led by retail (18%); overseas loans dipped 20/10% Domestic NIM stood at 3.96% (+45bps QoQ); foreign NIM jumped to 1.01% (+18bps QoQ) Watch-list down ~31% QoQ (51% ) to Rs 190bn with a sharp drop in cement and power exposures, the mgmt hinted at a partial upgrade in the cement exposure in coming quarters Incl. slippages of Rs 80bn from watchlist (incl. Rs 53.8bn from one cement AC) and Relapse of Rs 18bn; Retail slippages were stable QoQ at Rs 4.4bn Page 4

5 ICICI BANK : RESULTS REVIEW Overseas book declined ~21/10% YoY/QoQ Domestic loans grew ~14/4% YoY/QoQ, led by Retail growth of 18/7% YoY/QoQ to form ~51.8% of loans (+290bps QoQ) Corporate loans grew ~6% YoY to form 27.3% Within Retail loans, PL and CC segments delivered higher growth, albeit on a smaller base Within the retail segment, unsecured loans (CC, PL) stood at 9% vs. 8.9% QoQ Advances Growth Muted At 7% YoY Source: Company, HDFC sec Inst Research Retail Loans Break-up: Unsecured Book At 9% (%) 5,250 4,750 4,250 3,750 3,250 2,750 2,250 1,750 1,250 Advances (Rs bn) (LHS) growth (YoY) (RHS) Rs bn % Advances Mix: Retail Continues To Gain Source: Company, HDFC sec Inst Research Home Vehicle Other secured PL CC & Others Source: Company, HDFC sec Inst Research % Overseas Retail SME Domestic corporate Page 5

6 ICICI BANK : RESULTS REVIEW CASA grew ~28/6% YoY/QoQ to form ~50.4% (+450bps YoY) of deposits Avg. CASA ratio was up 170bps QoQ (after 330bps QoQ in ) at 46.5% SA grew ~28/4% YoY/QoQ and CA grew ~27/13% YoY/QoQ NIM was higher QoQ at 3.57% led by a sharp drop in CoF, interest on tax refund of Rs 2bn (vs. Rs 1.4bn QoQ) and interest recovery (12-13bps positive impact) Domestic NIM were at 3.96% (+45bps QoQ), international NIM jumped 18bps QoQ to 1.01% Overall core fees grew 10% Growth in retail fees was much better at 17% YoY, led by the cards business and third party distribution income Retail fees form ~70% of total fees Deposits Grew ~16/5% YoY/QoQ 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 Deposits (Rs bn) (LHS) Chg (YoY) (RHS) Rs bn % Overall NIMs Jumped 45Bps QoQ NIM Domestic NIM Foreign NIM (RHS) % % CASA Ratio Jumped 50bps QoQ % CASA Chg (YoY) (RHS) Fee Growth Led By Retail Fees Fee income % loan (annu) % CASA (%) - RHS % Fee income Chg (YoY) (RHS) % Page 6

7 ICICI BANK : RESULTS REVIEW Other income was lower owing to reversals of Rs 2.9bn toward foreign currency translation and NIL dividend income from ICICI Life Slippages of Rs 113bn include relapse of Rs 18bn and Rs 79.6bn from the watch-list (incl. one large exposure of Rs 53.8bn) Retail slippages stood at Rs 4.4bn vs. Rs 4.3bn Watch-list declined ~31% QoQ (51% in ) to Rs 190bn (4% of loans) Restructured book also dipped to Rs 42.7bn (90bps of loans) O/S SDR - Rs 52.4bn, w/w Rs 42.9bn are part of restructured and watch-list) O/S 5:25- Rs 26.75bn, w/w Rs 17.3bn part of watch-list Retail Fees (+16% YoY) Form ~70% Of Total Fees Rs bn Treasury 4.0 (0.8) Fees Others Total % of Total Gross Stress Additions Remains Elevated Source : Bank, HDFC sec Inst Research GNPA Movement Rs bn Slippages Restructured asset (incl. 5:25) GNPAs Rise 12% QoQ Opening Additions Recovery W/O Closing Slippage (% annu.) GNPA (Rs bn) GNPA (%, RHS) NNPA (Rs bn) NNPA (%, RHS) Page 7

8 ICICI BANK : RESULTS REVIEW Peer Valuations Mcap BANK (Rs bn) CMP (Rs) Rating TP (Rs) ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%) E FY18E FY19E E FY18E FY19E E FY18E FY19E E FY18E FY19E E FY18E FY19E KMB # 1, BUY 1, ICICIBC # 1, BUY AXSB 1, NEU IIB 854 1,436 BUY 1, FB BUY CUB BUY DCBB BUY SBIN # 2, BUY BOB BUY Equitas BUY Ujjivan NEU Source: Company, HDFC sec Inst Research, # Adjusted for embedded value of subs Page 8

9 ICICI BANK : RESULTS REVIEW Income Statement (Rs bn) P FY18E FY19E Interest Earned Interest Expended Net Interest Income Other Income Fee Income (CEB) Treasury Income Total Income Total Operating Exp Employee Expense PPOP Provisions & Contingencies Prov. For NPAs (Incl. Std Prov.) PBT Provision For Tax PAT Balance Sheet (Rs bn) P FY18E FY19E SOURCES OF FUNDS Share Capital Reserves , ,140.4 Shareholders' Funds , ,152.0 Savings 1, , , , ,412.6 Current Term Deposit 1, , , , ,996.4 Total Deposits 3, , , , ,295.7 Borrowings 1, , , , ,820.0 Other Liabilities Total Liabilities 6, , , , ,681.9 APPLICATION OF FUNDS Cash & Bank Balance Investments 1, , , , ,050.7 G-Secs 1, , , , ,573.9 Advances 3, , , , ,126.3 Fixed Assets Other Assets Total Assets 6, , , , ,681.9 Page 9

10 ICICI BANK : RESULTS REVIEW Key Ratios P FY18E FY19E VALUATION RATIOS EPS (Rs) Earnings Growth (%) 13.9 (13.0) BVPS (Rs) Adj. BVPS (Rs) ROAA (%) ROAE (%) P/E (x) P/ABV (x) P/PPOP (x) Dividend Yield (%) PROFITABILITY Yield On Advances (%) Yield On Investment (%) Cost Of Funds (%) Cost Of Deposits (%) Core Spread (%) NIM (%) OPERATING EFFICIENCY Cost/Avg. Asset Ratio (%) Cost-Income Ratio (Ex. Treasury) BALANCE SHEET STRUCTURE Loan Growth (%) Deposit Growth (%) C/D Ratio (%) Equity/Assets (%) Equity/Advances (%) CASA (%) Capital Adequacy Ratio (CAR, %) W/w Tier I CAR (%) P FY18E FY19E ASSET QUALITY Gross NPLs (Rs bn) Slippage (%) 2.19% 4.16% 7.46% 4.00% 3.25% Net NPLs (Rs bn) Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/Avg. Loans (%) ROAA TREE Net Interest Income 3.07% 3.11% 2.91% 2.88% 2.93% Non-interest Income 1.96% 2.24% 2.61% 1.89% 1.86% Treasury Income 0.25% 0.56% 1.15% 0.34% 0.28% Operating Cost 1.85% 1.86% 1.98% 2.03% 2.04% Provisions 0.63% 1.71% 2.04% 1.28% 1.20% Provisions For NPAs 0.51% 1.06% 1.72% 1.06% 1.00% Tax 0.75% 0.36% 0.20% 0.22% 0.27% ROAA 1.80% 1.42% 1.31% 1.24% 1.28% Leverage (x) ROAE 14.55% 11.43% 10.33% 9.78% 10.50% Page 10

11 ICICI BANK : RESULTS REVIEW RECOMMENDATION HISTORY ICICI Bank TP Date CMP Reco Target 2-May BUY Aug BUY Nov BUY Feb BUY Apr BUY May BUY May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-) 10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 11

12 ICICI BANK : RESULTS REVIEW Disclosure: We, Darpin Shah, MBA, and Pranav Gupta, ACA authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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