Published on 8/01/2021 11:24:37 AM | Source: Yes Securities Ltd

Buy ICICI Bank Ltd For Target Rs.705 - Yes Securities

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On strong footing

Structural benefits of strategic initiatives to fully manifest in coming years

Over the past 4‐5 years, ICICI Bank has impressively de‐risked and re‐balanced its core revenue streams by increasing the contribution of retail loans (65% of loans), de‐ emphasizing on international lending (7%), focusing on higher‐rated domestic corporate loans, reducing exposure to stressed sectors/borrower groups, substantially increasing the share of low‐cost sticky deposits and retailizing the fee income to a large extent. These structural benefits could not manifest itself desirably in return ratios of the bank due to recognition of legacy/incipient stress (impacted NIM though income reversals) and strengthening of provisioning cover (kept credit cost elevated). The sustainable core PPOP margin was improved to 2.4% over FY17‐20.  


Ready to capture growth opportunities across segments

On the Analyst Day in early December, the management sounded upbeat on bank’s growth prospects citing a sharp recovery in demand for consumption loans in recent months and promising opportunities in future underpinned by affluence growth and rising chances of pick‐up in corporate lending including revival in capex. The bank is ready to capture growth opportunities across segments with key enablers being comprehensive digital capabilities in Retail, Business Banking and Agri segments, robust distribution/customer management architecture, internally coherent/ecosystem‐based approach, deepening relationships with high‐rated corporates and sustained focus on low‐cost liabilities. Post the Rs150bn equity capital raise, CET‐1 ratio of the bank stands increased to 15%+. Augmented capital base positions ICICI Bank strongly for pursuing growth. We forecast a sharp growth uptick from FY22. 


Earnings to catapult over FY21‐23 

With stress recognition and provisioning related to the corporate NPL cycle behind and reasonable provisioning buffer created for likely Covid impact (1.3% of loan book), credit cost should fall significantly in FY22 and FY23. Our confidence stems from comforting management commentary on collection trends and evolving restructuring and delinquency patterns, relatively small ‘BB & Below’ book, restrained exposure to NBFC/HFCs, conspicuous absence/lower exposure of the bank to corporates/groups that have recently got in trouble and a high core PCR of 82% on NPLs. 

Trends in asset‐liability mix, improved relative pricing power, reversion of balance sheet liquidity to usual levels and contained net slippages should benefit NIMs over the medium term. A gradual improvement in the cost metric and core cost/income ratio is highly probable from the accelerated digital business acquisition and execution, and an integrated banking strategy (targeting eco‐system opportunities with a coherent approach). Thus, core PPOP margin and growth should get a fillip over FY21‐23. Overall, we estimate RoA to improve from 1% in FY21 to 1.6% in FY23. Core Bank still available at an attractive valuation of 1.8x FY22 P/ABV considering the projected robust profitability and growth delivery.  


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