ICICI Bank’s higher loan losses a surprise

In light of the higher-than-anticipated provisions, we are moving our provision-to-loans forecast up for 2015 to 1.0%

ICICI Bank’s third-quarter earnings grew a modest 14%, due to disappointingly high provisions as a result of a sharp increase in net non-performing assets (NPAs) to 1.12% of net assets, versus 0.81% last year. Loans in the power and gas sector were the key culprit, as these sectors undergo major regulatory changes on the supply side. Management guided for similarly high NPAs next quarter, which comes as quite a surprise, given that we didn't anticipate regulatory changes to have this large an impact on the bank’s balance sheet.

In light of the higher-than-anticipated provisions, we are moving our provision-to-loans forecast up for 2015 to 1.0%, while keeping our five-year forecast steady at 0.9%. This change results in a sharp drop in our fiscal 2015 earnings growth estimate to 16.5%, from 24.1%. Our fair value estimate on the stock is unchanged at INR 280.60 per share (or $9.20 per ADR). Despite a 5% retreat in the stock price following the earnings release, we continue to view the stock as overvalued, with the current price factoring in much faster margin expansion and loan growth.

Margins continued to expand as the cost-of-funds eased. This despite a growing deposit base (up 12%, versus our 10% estimate), which bodes well for the bank as it moves towards having better deposit coverage for its loans. Loan growth slowed to 13% for the twelve months to 31 December 2014, which compares to 16% in the same period last year, and below our 14% fiscal 2015 estimate, with corporate loan growth yet to pick up in a big way. Slower growth is not alarming, given Reserve Bank of India (RBI) stated that system credit growth slowed to 10.7% for the year-ending January 2015, compared to 14.5% last year. With returns on equity yet to sustainably remain above the 14% cost of equity mark, we maintain our no moat rating
.