Our readings of the annual report, including subsidiaries, reaffirm our view that ICICI Bank's balance sheet is getting stronger and the business is broadly back on track to deliver normalised levels of RoEs by FY2020-21. A best-in-class liability profile, steady and stable loan growth, negligible risk in the corporate portfolio (or international book) and inexpensive valuation drives our positive view. Maintain 'buy'; our top pick (FV revised to Rs 510 from Rs 460).
The key takeaways are that we are seeing improvement, especially in the corporate book. Asset quality concerns are abating rapidly and focus is shifting towards RoE improvement, normalisation (2) retail continues to have another strong year, delivering 15% yoy earnings growth; retail fees are >70% of the total fee income, (2) losses increased in the corporate banking business, led by high provisions for bad loans (3) capital market-related subsidiaries had a subdued performance while housing finance business reported a sharp decline in overall performance and (4) impaired loans in international subsidiaries have started to decline.
As highlighted in our previous notes, the decline in NPL ratios is underway with more scope for further reduction with lower impact on earnings given the bank's healthy coverage ratio.
This would be led partly by recovery and upgradation. While we believe the management guidance of 120bps for FY2020 on credit costs is conservative, it appears to be mostly driven by the timing mismatch between recovery of bad loans and regulatory provisions. It has no impact on our fair value as we look at these banks on adjusted book value basis.
The retail portfolio is not showing any signs of stress but we are monitoring the high growth in provisions in this book. This book is likely to emerge as a potential area of stress for the sector, but given that ICICI Bank's portfolio is in secured loans, this stress, if emerges, shouldn't be too worrisome. The bank's ability to report lower-than-peers NPL in this book should give comfort on the pro-cyclicality that the bank has been typically associated with, in the past.