Published on 14/01/2021 9:52:56 AM | Source: Motilal Oswal Financial Services Ltd

Buy ICICI Bank Ltd For Target Rs.525 - Motilal Oswal

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Steady operating performance; Prudential provisioning provides comfort

Disbursement near pre-COVID levels across segments

* ICICI Bank (ICICIBC) reported a steady quarter, with earnings driven by steady revenue growth, strong control on operating expenses, and lower provisions. The bank prudently used treasury gains from the 2% stake sale in ISEC to create further COVID provisions – taking the total COVIDrelated provisions to INR87.7b (1.3% of loans). Also, provision coverage strengthened further to ~82%.

* Core operating performance (excluding treasury / stake sale gains) remained strong even as margins declined due to excess liquidity. The bank witnessed a sharp increase in fee income on a sequential basis, led by improving disbursements across retail segments (which are near preCOVID levels). We increase our estimates by 16%/10% for FY21/FY22, factoring in moderation in credit cost. Maintain Buy.


Lower opex and provisioning drive earnings; PCR improves to 81.6%

* ICICI reported PAT of INR42.5b (significantly above estimates) supported by treasury income / stake sale gains and controlled provisions (61% QoQ decline). Overall, the bank holds COVID-related provisions of INR87.7b (1.3% of loans). In 1HFY21, NII/PPOP grew 18%/45%, and PAT increased 167% YoY to INR68.5b (v/s INR25.6b in 1HFY20).

* NII stood at INR93.7b (16% YoY growth; in-line) despite margins declining 12bp QoQ to 3.57% (18bp QoQ decline in 1Q) due to excess liquidity.

* Other income declined 4% YoY to INR40.3b, although it was supported by treasury gains of INR5.4b (including INR3.0b from a 2% stake sale in ICICI Securities). On the other hand, core fee income picked up sequentially (49% QoQ growth), driven by strong revival in retail loans (6% QoQ). Retail contributed 76% to total fees. Opex declined 5% YoY to INR51.3b, resulting in core PPoP growth of 18% YoY.

* Advances increased 6.4% YoY (+~3.4% QoQ), with the domestic book growing at 10% YoY (~13% YoY growth in retail), while the overseas loan mix declined to 6.5% (7.5% in 1QFY21). Deposit growth was strong at 20% YoY, led by term deposit growth at ~26% YoY. The avg. CASA mix stood at 40.3%.

* Fresh slippages came in at INR30.2b (INR14.1b was not recorded due to the SC order). Overall, the GNPA/NNPA ratio improved by 29bp/23bp QoQ to ~5.2%/1.0% and PCR to 81.6%. If not for the SC order, GNPA/NNPA would have been higher at 5.36%/1.12%. The BB & Below portfolio declined to INR162b (v/s INR171b in 1QFY21)


Highlights from management commentary

* Collection trends across most segments are near pre-COVID levels or better than anticipated, while demand resolution under the CV portfolio remains lower. Overall, demand resolution in the retail business is at ~97% of pre-COVID levels.

* Restructuring: The bank has received a restructuring application of INR20b. Restructuring in the corporate portfolio is likely to be less than 1% of total loans.

* SMA/Overdue across portfolio: The overdue books for retail and credit cards were 4% higher than pre-COVID levels; the rural portfolio stood at 1%, while the SME book was at pre-COVID levels. Domestic and international corporate overdue is less than 3% of total loans.


Valuation and view

ICICIBC reported a steady quarter, with opex control and lower provisioning driving earnings growth. Business trends are improving, with disbursement reaching preCOVID levels / higher than pre-COVID levels (in some segments). Demand resolution has reached ~97% of pre-COVID levels, with the SMA/overdue book 1–4% higher across segments. The bank expects the corporate restructuring book to be ~1% of loans and guided for normalization of credit cost in FY22. ICICIBC carries an additional provisioning buffer of 1.3% of loans, while the BB & Below book declined during the quarter – although it is likely to increase in the coming quarters. The liability franchise continues to improve, with cost of deposits declining to 4.2%, while a lower CD ratio provides a strong growth opportunity. We expect RoA/RoE of 1.4%/12.8% for FY22E. Maintain Buy, with SOTP-based Target Price of INR525 (1.8x Sep’22e ABV for the bank).


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