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ICICI Bank Rating: Buy; Q4 was in line for estimates operationally

Nomura

ICICI Bank s Q4FY19 performance was operationally in line with NII/core PPoP growth of 20%/18% y-o-y. The PAT miss was mainly due to accelerated provisioning/write-offs. We expect NIMs to gradually trend up (as guided by management) and that coupled with normalising credit costs makes us expect RoEs of 15.5%/ 16.2% by FY21/22F. We lift our TP to Rs 500 (with implied upside of 25%), implying 2.05x (2x earlier) FY21F book for the bank and Rs 115/sh (Rs 105 earlier) of subsidiary value. With rising granularity of the balance sheet and visibility of +16% RoEs, we believe current valuation at 1.6x FY21F stress adjusted book is still undemanding. We maintain our Buy rating. ICICI remains one of our preferred sector picks.

Asset quality stable

Slippages of Rs 35.4 bn included Rs 8.2 bn of granular slippages, Rs 8 bn of technical slippages (sugar account) and the remaining Rs 18 bn of corporate slippages was from the watchlist. The bank s exposure to new stressed names over the past six months is fairly low and is reflected in negligible additions to the BB and below book. With NPA coverage at 70%, we expect near-normalised slippages in FY20F.

Core PPoP trend improving

(i) Core PPoP was up 18% y-o-y driven by 20% y-o-y growth in NII and stable core fee growth of 15% y-o-y; we expect core PPoP growth to sustain 20% growth over the next two years; (ii) NIMs included 25bp of one-off, excluding which NII was up 20% y-o-y, with 45% average CASA, improving loan mix and pricing power, we expect NIMs to expand by 10bps y-o-y in FY20F; (iii) opex growth accelerated to ~20% y-y in 2HFY19F mainly due to retiral provisions, while cost growth should moderate, we think it is unlikely to be a major RoA/RoE driver.

+16% ROE visibility

While management maintained its Jun-20 guidance of 15% RoE for now, we believe with improving margins and leverage, RoEs will improve to 16% by FY21-22F. Our expectation of 16% RoEs is based on +13% CET-1 ratio which leaves further scope for leveraging up RoEs.

Management guided for 120-130bp of credit costs in FY20F

While it expects medium-term credit cost to normalise to 100bp, it expects some slippages from its agri portfolio and expects ageing-related provision to keep near-term credit cost elevated. Despite large write-off of Rs 73 bn, provision cover improved to 71% (up 220bp q-o-q). Higher provisions led to a miss on PAT despite in-line PPoP performance. Overall BB and below book stands at Rs 175 bn (3% of loans). We expect slippages of Rs 290 bn over FY20-21F with credit cost of 120bp in FY20F improving to 90bp in FY21F.