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Buy ICICI Bank Ltd For Target Rs. 750 - Motilal Oswal

Operating performance steady; treasury loss drives earnings miss

Asset quality improves; higher prudential provisioning provides comfort

* ICICIBC reported strong performance on the business front, with loan growth showing robust trends across Retail, SME, and Corporate portfolio. Core operating performance remains robust even as muted fee income trends and treasury loss resulted in a PAT miss.

* On the asset quality front, controlled slippages of INR55b and healthy recoveries and upgrades resulted in QoQ improvement in GNPA/NNPA ratio to 4.96%/1.14% (v/s pro forma GNPA/NNPA ratio of 5.42%/1.26%). PCR stood ~78%, the highest in the industry. Restructured loans were controlled at 0.5% of loans. The bank still holds a COVID-related provision buffer of INR74.75b (~100bp of loans) despite utilizing provisions of INR35.1b during 4QFY21. This provides comfort on normalization in credit cost. However, the surge in COVID-19 cases and the resultant impact from regional lockdowns would be a key to watch in the near term. Maintain Buy.

Strong business performance; margin expands 17bp

* PAT stood ~INR44b (below our estimate), largely affected by treasury loss and muted fee income trends. NII growth was strong at 16.8% (in line), led by recovery in loan growth and 17bp QoQ improvement in margin to 3.84%. During FY21, NII/PPOP grew 17%/29.5%, while PAT grew 104% YoY to ~INR162b.

* Other income declined 3% YoY (19% below our estimate) to INR41.1b, affected by treasury loss of INR250m and muted fee income trends (6% YoY). Retail contributed 77% of total fees. Opex grew 3.6% YoY, enabling core PPOP growth of 20% YoY.

* On the provisioning front, the bank utilized contingency provision of INR35.1b towards pro forma NPAs, while making additional COVID-19 related provisions of INR10b. Overall, the bank made total provisions of INR28.8b during 4QFY21. The bank now holds COVID-19 related provisions of INR74.75b (1% of loans).

* Advances growth was robust (14% YoY, 5% QoQ), with domestic book growing 18% YoY, led by strong revival across business segments. Retail/Corporate grew 6.6%/3.9% QoQ, while SME grew 11.8%. It has disbursed INR127b/INR15b under ECLGS 1.0/2.0. Within Retail, robust sequential trends was seen in Mortgage (~8% QoQ), Personal loans (6.4% QoQ), and Rural loans (~7% QoQ). On the liability front, deposit growth stood at 21% YoY, led by CASA (24% YoY). Average CASA mix improved to 42.5% (v/s 41.8% in 3QFY21).

* Asset quality: Fresh slippages stood at INR55.2b (v/s pro forma slippages of INR73.4b in 3QFY21). Also, higher recoveries and upgrades in the corporate/SME book of INR17.4b enabled GNPA/NNPA decline to 4.96%/1.14% (v/s pro forma GNPA/NNPA ratio of 5.42%/1.26% in 3QFY21), while PCR stood at 77.7%. Total restructured loans stood at INR39.3b (0.5% of loans), of which INR20.1b is in the Retail portfolio and INR19.1b is in the SME/Corporate portfolio. The BB and below portfolio declined to ~INR131b (v/s INR136.5b in 3QFY21).

Highlights from the management commentary

* The bank is seeing healthy issuance of Credit Cards and strong market share gains.

* The impact of refund of interest on interest charged during the moratorium period stood at INR1.75b (4bp NIM impact).

* There are three corporate accounts (one LRD + two Commercial Real Estate), which got restructured.

Valuation and view

ICICIBC reported a strong quarter, led by healthy business performance across all business segments. Strong operating performance was aided by healthy NII growth (17bp NIM expansion), though weak other income affected net earnings. Asset quality remains under control with controlled slippages and total restructuring at 0.5% of loans. Provision coverage remains best in the industry.

The bank holds a COVID-related provision buffer of INR74.75b (1% of loans), providing comfort on anticipated normalization in credit cost. However, rising COVID-19 cases and regional lockdown would be a key to watch out for in the near term. Liability franchise continues to improve with healthy CASA growth. The bank has delivered double-digit RoE (~12.6%) for the first time post FY17 and we expect RoA/RoE to improve to 1.7%/15.2% in FY23E. Buy with a revised SoTP-based TP of INR750/share (2.4x FY23E ABV for standalone bank).

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