Published on 23/12/2020 10:32:37 AM | Source: HDFC Securities Ltd

Buy ICICI Bank Ltd For Target Rs.503 - HDFC Securities

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Balance sheet strengthened further. Maintain BUY

ICICIBC’s 2Q earnings were significantly ahead of estimates, led by better- than-anticipated operating performance and lower-than-expected provisions. Like most banks in 2Q, ICICIBC reported a swift improvement in collections and disbursals. Unlike some banks, ICICBC did see some slippages this quarter (~1.9%). The bank has built significant provision buffers in terms of COVID-19 related (~1.3% of loans), standard assets and other provisions (~0.9%) and specific loan loss provisions (81.6% PCR), which should limit the need for incremental provisions. Lower LLPs are likely to drive return ratios beyond the near term. ICICIBC’s robust funding position (CRAR+ deposit franchise) will allow the bank to capture resurgent growth. ICICIBC remains our preferred bet. Maintain BUY with a revised target price of Rs 503.


* Asset quality: GNPAs dipped 120/29bps YoY/QoQ to 5.2%. However, this was optical due to (1) the recent SC order, (2) the recent moratorium, and (3) high write-offs (6.1% of opening NPAs). Despite (1) and (2), slippages came in at ~1.9% (+23/115bps, retail- ~1.7%, corporate and SME- ~2.3%). Adjusted for the impact of the SC order, slippages and GNPAs would have been 2.8/5.36%. Corporate slippages were almost entirely from the BB and below- rated pool (proactive recognition in some cases). Retail slippage trends are slightly worrisome. BB and below-rated corporate and SME exposures dipped ~5.5% QoQ to Rs 161.7bn (2.5% of loans). The bank has received restructuring requests of ~Rs 21bn so far. The management guides for higher slippages and downgrades into the pool of BB and below-rated exposures in 2HFY21 (and expectedly so).


* Collection trends: Interestingly, collections neared pre-COVID-19 levels inSeptember and October. Several banks have positively surprised on this front with similar commentary/metrics. ‘Demand resolution’ for September was at ~97% of pre-COVID-19 levels (99%+). Retail and credit card demand resolution too was at ~97%.


* Non-tax provisions dipped ~60.6% QoQ to Rs 30bn, but remained elevated YoY (+19.5%, 1.87% of loans). Incremental COVID-19 related provisions amounted to Rs 5bn, taking the total stock of such provisions to Rs 87.72bn (1.34% of loans). ICICIBC provided for ~35% of the value of accounts that would have slipped, adjusted for the recent SC order. Calculated PCR rose to 81.6%, which is creditable, given the sizeable write-offs and material NPL accretion during the quarter. We like the prudent approach to provisioning the bank has followed so far. The management expects provisions to normalise in FY22 and stated that normalised provisions would equal ~25% of PPOP. We expect LLPs of 1.9% in FY21E and 1.4% over FY22-23E (31% of PPOP). Lower credit provisions would be the biggest driver of return ratios.


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