Evolving into a full-stack Digi-Bank - longterm winning strategy for incumbents
* Our Digi-Banking Conference on November 26 emphasized that the Digital thrust is turbocharged due to Covid-19, while digitization and ‘fintegration’ are the way forward for incumbents. Over the years, ICICI has been evolving into a full-stack digital bank with endto-end digital solutions across businesses and is well-poised to ride the digital boom.
* ICICI Bank has made adequate investments in digital platforms, leading to virtually no outages - unlike its large peers that have recently faced regulatory ire - and better customer wallet share/profitability. The bank believes that its focus on balanced ‘Phygital strategy’ and customer life-cycle banking should lead to better revenues, cost savings - boosting core-profitability in the long run.
* Although the discussions were centered around digital initiatives, management reassured its long-standing risk-calibrated growth strategy, focus on customer-level profitability and better asset-quality experience in the current cycle with adequate provisioning buffers in place.
* We believe that ICICI’s likely strong delivery on growth, asset quality and return ratios despite the Covid-induced disruption, coupled with its evolution as a strong retail-cumdigital bank, will call for a re-rating. Retain Buy/OW in EAP with a revised TP of Rs600.
Digital platform acts as a force multiplier in retail banking: ICICI has already built a strong and resilient retail banking portfolio (share at 66%) and has reported historically best mortgage disbursements in recent months. After Covid-19, there is a J-Curve digital adoption by customers and ICICI Bank - with its full digital stack - has been able to service and onboard new customers, riding the digital transformation. Based on analysis, digital customers maintain higher a/c balance (1.8x) and also offer higher transactional flows (individual/enterprise), leading to a healthy CASA. The bank plans to use digital tools such as Customer 360 degree view/iGenome for customer profiling, cross-selling products/services across the customer life cycle, and also to target microcustomer segments, driving growth, reducing cost of customer acquisition (60% lower than physical) and improving customer-level RoE, in turn feeding into the bank’s profitability. The bank also extensively uses digital tools/partnerships to improve risk management and collections, which will be one of the driving factors for better asset-quality experience after Covid-19.
Corporate and Business banking largely digitized, with focus on Return of Capital and Return on Capital: Corporates, SMEs and BB customers are far more digitized than before and banks are no more capital providers, but are becoming business partners. ICICI Bank has developed an entire digital stack for Corporate/Business banking customers and is extensively using digital tools to onboard new/service existing customers and improve portfolio quality, thereby not only ensuring ‘Return of Capital’ but also earnings quality, i.e., Return on Capital.
Maintain Buy: We believe that ICICI’s emergence as a strong retail-cum-digital bank, expected better asset-quality experience with strong provisioning/capital buffer, and thus better growth trajectory and return ratios over FY22/23E will drive a re-rating. We raise our TP to Rs600, valuing the standalone bank at 2x Dec FY22E ABV and subs at Rs114. Retain Buy/OW in EAP. Key risks: higher-than-expected NPA formation in retail, slow growth and top management attrition.
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