ICICI Bank’s consolidated and standalone third-quarter 2016 earnings rose by 6.6% and 9.3% respectively over the prior year, on account of higher provisioning and bad loan recognition by the bank after the recent banking system review by the Reserve Bank of India, RBI.
On account of prudential recognition, ICICI Bank has undertaken higher provisioning against large loans given to a steel company, which is yet to cross the 90-day nonpayment hurdle that otherwise classifies them as bad loans. Nonperforming advances jumped to 4.7% from 3.8% in September quarter. In view of these higher provisions, we increase our 2016 consolidated provisions up to INR 79 billion from INR 60 billion, and lower our earnings estimate to INR 130 billion, from INR 144 billion. Our consolidated earnings growth estimate decreases to 6.3% from 18.0%. The negative impact of this earnings adjustment gets negated against the positive time-value-for-money adjustment since our last fair value estimate update in April 2014. As a result, the change to our short term forecast has no impact on our fair value of INR 327 per share, or $10 per ADR.
The stock currently trades 30% below our fair value estimate and is currently undervalued. However, given that ICICI Bank typically has higher nonperforming assets compared with its peers HDFC Bank, Axis Bank, Indusind Bank, and Kotak Mahindra bank in a cyclical downturn we caution investors from expecting a quick uptick in the stock price as asset quality concerns continue to drive market sentiment for this narrow moat name.
Management has guided for another quarter of high provisions and we factor this into our 2016 earnings forecast, while keeping our five-year explicit average growth forecast at 14%. Despite higher loan provisions, the company remains adequately capitalized with 16.7% capital adequacy ratio and 12.8% Tier 1 capital, after including this quarter’s profits. We maintain our high uncertainty on the stock.
