ICICI Bank tanks over 4%; Should you dump the stock?

Here is a quick compilation of what brokerages suggest

ICICI Bank continued to lose ground in trade on Monday, after the bank posted a dismal set of results for the March 2016 quarter last week. On the Bombay Stock Exchange (BSE), the stock lost nearly 4.5% in intra-day trade to Rs 226 levels. Its market-capitalisation (market-cap) at Rs 132,680.86 crore as at 11:15am slipped below that of Kotak Mahindra Bank at Rs 131,617.28 crore.

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By comparison, the S&P BSE Bankex had lost 1.1% till 11:15am, while the S&P BSE Sensex was trading nearly 1% lower at 25,375 levels.

The stock, however, recovered some of the lost ground. Its market-cap at Rs 131,966.17 crore, too, edged past that of Kotak Bank at Rs 131,782.01 by close of trade.

 

Last week, ICICI Bank had reported 76% fall in its net profit for the January-March quarter to Rs 702 crore, as it set aside additional contingency reserve of Rs 3,600 crore. This is its sharpest ever quarterly drop in net profit.

So, should you dump the stock? How long will the stock continue to underperform? Here is a quick compilation of what the country’s top brokerages recommend:

CENTRUM BROKING

We retain Buy on ICICI Bank, with an SOTP-based target of Rs 300. While Q4FY16 results were in-line with our estimates on operating front, the bank as a prudent measure has set aside Rs 3,600 crore (0.8% of loans) as contingency reserves. We have revised our estimates on slippages/credit cost front over FY17-18E. Capital position remains healthy and return ratios respectable. Valuations remain undemanding. Spike in stressed assets or higher-than-expected margin compression remains a key risk.

PRABHUDAS LILLADHER

Margins were under pressure in overseas business and on higher interest reversals from continued slippages in corporate book, despite cost of funds falling by 12bps QoQ. Going ahead, margins are likely to remain under pressure in FY17 on sluggish overseas book and cautious outlook on corporate book.

ICICI Bank has created a watch list for below investment grade assets in six sectors and certain leveraged promoter groups. This will be key monitorable in FY17. We fine?tune our earnings to factor higher credit cost and revise our rating to 'Accumulate' and our price target to Rs 250 (from Rs 300) based on 1.4x Sep?2017E ABV (adjusted book value).

RELIGARE INSTITUTIONAL RESEARCH

The bank expects provisions to remain elevated but refrained from giving any guidance on credit cost for FY17. (2) SME/corporate loan growth was poor at 9.8%/7%. (3) Management stated that most of the credit growth in FY17 would be driven by retail loans. (4) The bank’s tier 1 ratio improved by 90bps due to relaxation given by RBI.

We slash our FY17/FY18 estimates by 18-20% citing margin pressure and elevated provisions, and according revise down our March’17 target price to Rs 200 from Rs 230 earlier. We maintain our SELL rating as we believe that any meaningful improvement in stressed asset formation is still a while away for the bank.

EMKAY GLOBAL

Reported earnings came in 81% below our estimate on account of one-off contingent provisions made by the bank. Adjusted for this earnings was in-line with our estimate. ICICI Bank’s operating performance was weaker than expected on account of fresh impairments. The bank made contingent provisions on its risky exposure and profitability was salvaged by gains on stake sale and tax write-back. 

We see near term headwinds in terms of asset quality and earnings as one-off gains may not come to help every quarter. We expect credit costs to stay elevated (170bps in FY17), with average RoA and RoE of 1.5% and 12%, respectively, in FY17-18. The key factors that are in favour of the stock is low valuation, strong liability mix and changing asset mix. We downgrade our rating to HOLD with our revised target price of Rs257 (Rs270 earlier).

KOTAK SECURITIES

At CMP, stock trades reasonable at 11.3x its FY18E earnings and 1.5x its FY18E adjusted book value (9.1x and 1.0x, respectively, after stripping the value for subsidiaries). We have tweaked the earnings estimates for FY17E and expect net income to grow 11.8% CAGR during FY16-18E (albeit on low base). We are of the view that bank would continue its focus on liability franchise and profitability (RoE is likely to improve to 15%+ levels during next 2 years with increase in leverage).

We retain BUY rating on the stock with revised target price of Rs 314 (Rs 312 earlier) based on SOTP methodology, where the standalone business is valued at Rs 237 (1.5x FY18E ABV) and the subsidiaries are valued at Rs 77.

EDELWEISS SECURITIES

We believe these are challenging times for banks manifested in temporary lull in earnings; however, one must not ignore the sheer franchise prowess enabling ICICI Bank deliver healthy normalised returns post this. In spite of stress, we still maintain ‘BUY’ given: a) ~30% of current price reflects stable value of subsidiaries (recent deals lend comfort on realisability); b) stable RoA and RoE (1.8%/14% despite higher credit cost); and c) other operating parameters—CASA, and retail assets—are consistently improving.

Key Risks: With banks getting aggressive on retail side maintaining retail traction may turn out to be a challenge. Deterioration of macro environment can result in higher restructuring and slow down business growth.

MOTILAL OSWAL RESEARCH

While near-term asset quality challenges persist, strong capitalization (CET1 of 13.1%), significant improvement in granularity of loan book (~52% retail and SME), sharp improvement in liability profile and valuation at 1.1x core AP/ABV keeps us positive. We roll forward target price to FY18 and maintain Buy with SOTP (SUM-OF-THE-PARTS) of Rs 300 (v/s Rs 320 previously) implying 27% upside.