Assuaging concerns on ICICI Bank's asset quality to provide the case for stock re-rating?

ICICI Bank is grappling with issues related to inquiries for irregularities and wrongdoing under on-leave CEO Chanda Kochhar. The bank came out with its Q1FY19 results on July 27, 2018.

Jul 30, 2018 01:07 IST India Infoline News Service

ICICI Bank is grappling with issues related to inquiries for irregularities and wrongdoing under CEO Chanda Kochhar. Kochhar's leadership at the bank has come under a cloud over the Videocon loan case involving her husband and NuPower Renewables founder Deepak Kochhar and the promoter Venugopal Dhoot. The allegations against Kochhar relate to a Rs3,250cr loan granted to the Videocon Group in 2012. In March 2018, a whistle-blower alleged that Kochhar's husband and her family members had benefited from these dealings.

Under the pressure of mounting investigations, ICICI Bank's Board appointed Sandeep Bakshi (former MD & CEO ICICI Prulife) as COO and whole-time director, effective June 19, 2018, for a period of five years, while Kochhar was asked to go on an indefinite leave until the conclusion of the inquiries.

The investor community has taken this news positively, as a lot of uncertainties that indirectly affected the bank's operations prevailed under Kochhar. With the appointment of Bakshi, the bank will now get a new direction, which is a positive for the lender.

Recently, the US markets regulator Securities and Exchange Commission (SEC) intensified its investigation into alleged wrongdoings at ICICI Bank. SEC, which started the probe in June 2016, sought details about the bank’s accounting practices, especially those related to loans disbursed between 2010 and 2016. The probe gathered pace after a third whistleblower complained to SEC that ICICI Bank unfairly delayed provisioning in at least 31 loan accounts to inflate profit by at least $1.3bn over eight years. On March 20, the whistleblower alleged that ICICI Bank issued hundreds of letters of credit (LCs) to entities related to its troubled corporate borrowers to help them avoid defaults.

The bank came out with its Q1FY19 results on July 27, 2018. Its revenue for the quarter came at Rs18,574cr, which was up by 10.1% yoy. NII came at Rs6,102cr as against Rs5,590cr in Q1FY18, up 9.2% yoy. The bank has reported a net loss of Rs119.6cr in Q1FY19 as against our estimates of net profit of Rs730cr, and Rs2,204cr profit reported yoy. The miss in our net profit estimates was due to 129% yoy increase in provisions during the quarter to Rs5,971cr. Its PCR ratio has improved by 560bps qoq to 66.1%. Provisions increased sharply driven by an aging-related provision of 100% on one large steel account. Provisions included Rs707cr on account of increase in provisioning on secured portion of loans under NCLT proceedings from 40% as of 4QFY18 to 50% in 1QFY19.

The overall NIM for the quarter came at 3.19% as against 3.2% qoq, (declined by 1bps). Its GNPA for Q1FY19 stood at 8.81% against 8.84% qoq, which has decreased by 3bps. NNPA for the quarter came at 4.19% against 4.77% qoq, which has declined by 58bps. Management indicated that the bank would have limited ability to pass on the increase in funding costs through raises in MCLR. At best, the bank would be able to maintain margins by passing on the entire increase in costs. However, management was skeptical about banks’ ability to expand margins in the current scenario. Management stated that there were no further plans to dilute stake in subsidiaries in the remainder of FY19. Management reiterated its target of 15% consolidated ROE by June 2020E.

Total advances increased by 11% yoy to Rs5.16 lakh cr. Growth was primarily driven by retail loans (+20% yoy) and SME loans (+17% yoy). Within retail, unsecured personal loans and credit cards continued to register high growth. The domestic corporate segment registered muted growth (+5% yoy).

The bank disclosed an additional pool of assets rated BB and below (ex-net NPA and earlier disclosed stressed pool of Rs13,370cr as of FY18). This consisted of Rs5,450cr to SME borrowers with outstanding exposures >Rs100cr and Rs6,690cr to those with outstanding exposures. The total pool of assets rated BB and below, across corporate and SME, now stands at Rs24,730cr. Overall stressed assets are at 15.8% in 1QFY19. Its slippage ratio dropped to 3.7% in 1QFY19 as against 14.3% in 4QFY18. Slippage of Rs4,036cr was the lowest in 11 quarters. Of the total slippages of Rs4,040cr, 72% (Rs2,910cr) were on account of corporate and SME segments and 28% (Rs1,130cr) on account of retail. The management stated that there was some slippage from the builder finance portfolio. Of retail slippages, Rs336cr was on account of Kisan Credit Cards. Based on the bank’s internal ratings for the total loan book, 63% of loans are rated “A- and above”, up from 52% in FY16. The share of loans rated “BB and below correspondingly declined over the same period.

Management reiterated its objective to reach a Provision Coverage Ratio (PCR) of 70% (excluding prudential write-offs) by FY20E and stated that this increase would be front-loaded more over the next few quarters. This indicates that provisions would remain elevated through FY19E.

Going forward, management's focus would be on (i) growing the retail loan portfolio (57.5% of loans as of 1QFY19), (ii) growing the corporate loan book with a focus on highly rated corporates (the bank would remain cautious about lending to projects under implementation), and (iii) monitoring provisioning requirements.

Total stressed assets stood at Rs81,640cr including GNPLs of Rs53,460cr and other stressed assets of Rs28,180cr. Of the other stressed assets, Rs12,140cr of “BB & below” (2.3% of net loans) was disclosed for the first time in 1QFY19. Drill-down list of Rs4,400cr predominantly consists of one large steel exposure and one large power exposure. Management sounded confident that the bank was at the tail end of the NPL cycle.

We forecast advances growth of 18% CAGR over FY18-20E driven by retail & SME segment. Slippages under watchlist to reduce with lending to higher rated companies and upgrades from lumpy steel and infra sector. Further, the bank’s focus on lending to higher rated companies is expected to assuage its NPA woes. With robust retail advances and lower cost of funds, we see NIMs increasing by 30bps to 3.3% over FY18-20E. We forecast earnings CAGR of 96% over FY18-20E due to improved asset quality and higher PPOP. Hence, we expect RoE and RoA to improve by ~340bps and 30bps to 11.8% and 1.3% respectively by FY20E. The stock trades attractively at ~1.7x on FY20E P/BV. We have a positive outlook on the stock.

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