ICICI Bank shares rated ‘Hold’ by Jefferies, SOTP value Rs 295

ICICI Bank reported a soft quarter with no clarity on the asset quality ‘rabbit hole’ contrary to street’s expectation of things getting better. Outside watchlist (WL) slippage were high. No material information was offered on stress outside WL & credit cost guidance. Maintain Hold. Prefer Axis Bank in the private corporate banks. The total net stressed assets including drill-down exposures declined to 10.28% of net advances vs. 10.52% q-o-q. PCR improved only marginally to 41.4% q-o-q (vs. 47.1% in Q3FY17) in spite of partial recovery of the large cement account which slipped in Q4FY17 & had taken down the coverage to 40.2%.

ICICI Bank reported a soft quarter with no clarity on the asset quality ‘rabbit hole’ contrary to street’s expectation of things getting better. Outside watchlist (WL) slippage were high. No material information was offered on stress outside WL & credit cost guidance. Maintain Hold. Prefer Axis Bank in the private corporate banks. The total net stressed assets including drill-down exposures declined to 10.28% of net advances vs. 10.52% q-o-q. PCR improved only marginally to 41.4% q-o-q (vs. 47.1% in Q3FY17) in spite of partial recovery of the large cement account which slipped in Q4FY17 & had taken down the coverage to 40.2%. Non-watchlist corporate slippage high and not contoured. Rs 49.8 billion slipped in Q1FY18, o/w non-watchlist corporate slippages spiked to Rs 21.2 billion vs. an average run-rate of Rs 14.6 billion in the four prior qarters on account of a chunky slippage. Management indicated possibility of similar large-ticket slippages in 2-3 corporate accounts outside the watchlist during the year, while maintaining that overall slippages will be lower than FY17. Core PPOP was up only 2% y-o-y & was 14% below our estimate. The outlook on NIM though remains challenging, given impact of repricing of existing loans & lower yields on incremental loans. Further, the subsequent quarters may not see the impact of interest on income tax refund, which boosted NIM by ~10bps this quarter.

Management continues to guide for full year NIM to be above 3%. We bake NIMs higher than management guidance in FY18 and moving up in FY19-20E offset by higher costs resulting in core PPOP decline. We expect a significant cleanup/provisioning in FY18 (credit cost at 2%). Thereafter we lower credit costs < 100bp in FY19-20E in line with our top-down view on corporate credit costs. RoE trajectory though remains weak, improving slightly north of 13% by FY20E. Our FY17-20E EPS CAGR is 20%, and adj. BV is 16%. Our SOTP value is Rs 295 – core bank valued at 1.3x adj. book (Jun 18E), life insurance at 3.5x EV, general insurance at 35x trailing P/E, AMC at 5% AuM among the key subsidiaries. Risks: Downside – Lack of clarity on asset quality, NIM weakness and loan growth slowdown. Upside – Asset quality improvement.