India's ICICI Bank flexing more granular balance sheet

ROEs are also inching towards optimum levels.

India-based ICIC Bank’s 1QFY15 PPOP /asset quality performance was in line and ~6% PAT beat was largely driven by one-offs, while performance on most operating metrics except core fees was robust with better-than-expected margins (+5bps q-q).

According to a research note from Nomura, the bank also posted ~15% CASA growth and even asset quality normalized after a spike in restructuring in 2HFY14.

Profitability improvement over the last two years for ICICI/Axis has surprised despite challenges in the corporate book.

With macros expected to improve, we expect profitability to sustain and that will drive re-rating as credit concerns ease.

Here’s more from Nomura:

1Q Hits: 1QFY15 performance met or beat expectations on most counts.

Domestic margins continued to improve given robust CASA and FCNR funding advantage - FY15 guidance indicates flat margins vs FY14;

Opex growth has moderated and with net hiring unlikely to match FY14 levels, opex growth moderation should continue and

Gross slippage trend was stable and restructuring at INR14bn was back to trend levels after a spike in 2HFY14, in line with management’s guidance.

1Q Miss: Core fees growth of 8% y-y missed expectations due to sluggish corporate activity and related FX business.

A pick-up is expected only with revival in corporate growth by end-FY15F but we see little risk to our PPOP estimates as NIMs have surprised and opex growth is likely to moderate.

Catalysts: 1) continuation of stability in asset quality and 2) pick-up in corporate growth in 2HFY15F that will further drive growth/profitability.

Valuation: Appears reasonable despite recent re-rating.

Our INR1,650 TP is based on 2.1x Mar-16F book for the lending business and INR272 of subsidiary valuations.

ICICI continues to trade at ~40% discount to retail banks despite their improving return ratios and liability profile.

As credit concerns ease, we expect valuation gaps with retail banks to narrow.