Q4FY14 earnings came in at R26.52 bn (15% year-on-year) in line with our estimates. Like other private banks, ICICI focused on profitability over growth and there was no real surprises as most of the operating parameters were stable. Stock was down 2% at close due to profit booking.
Q4 operating metrics: Loan growth at 17% y-o-y was mainly driven by retail loans (23% y-o-y) – mainly secured while corporate (8% y-o-y) and SME (-1%) growth remained subdued. Amongst retail, all the segments continued to do well except CV (commercial vehicle) loans, while auto loans growth remains strong at 39% y-o-y. Other income adjusted for capital gains and repatriation gains grew by 19% y-o-y while core fee growth was sluggish at only 11% y-o-y primarily driven by retail.
Funding costs have now flattened to 6.2% helping margins remain firm at 3.35% overall and rise to 3.7% for domestic business with CASA (current account, savings account) remaining stable at 43%. Operating expenses grew 20% y-o-y on account of higher provision for variable pay expense and high staff addition is likely to moderate going ahead.
Asset Quality was a mixed bag –gross NPL was stable at 3%, credit costs surprised slightly positively coming in a tad below expectations at 86bps. However the restructured book saw additions of R21.6bn of loans and the total restructured book now stands at R105.6 bn (3.1% of loan book). The stated pipeline of R15 bn appears to be on a declining trend. Tier-1 remained robust at 12.8% and ROA (return on assets) was 1.9%
Earnings outlook: We fine-tune our estimates by nudging up loan growth to 19-20% for FY15-16e offset by slightly higher credit costs at 90bps resulting in negligible changes to the bottom line. We expect margins to remain firm and asset quality stable, resulting in 17, 21% net profit growth in FY15e, 16e, respectively.
Valuations and target price: ICICI is currently trading at 1.9x P/AB (price-to adjusted book value)-12-month forward and 1.6x excluding subsidiary value. Given the anticipated turnaround in the economy along with visible signs of a growth and asset quality turnaround we increase our target book multiple for the parent bank from 1.5x to 1.7x based on single stage Gordon growth model and roll forward our ABV to FY16e, increasing our target price to R1,498, implying a potential return of 20%. Retain OW.
Key risks: (i) Slower than expected loan growth momentum; (ii) spike in NPLs (non-performing loans) and