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Buy ICICI Bank Ltd For Target Rs.835

Steady quarter; earnings progression to remain strong

Elevated slippages partially offset by higher recoveries; PCR remains strong

* ICICIBC reported strong earnings performance, led by robust core PPOP, aided by healthy NII growth (5bp NIM expansion). Also, lower provisions (23% below our estimate) drove the earnings beat v/s our estimate. The bank is thus progressing well towards earnings normalization.

* Fresh slippages stood elevated at INR72.3b (annualized ~4% of loans), pre-dominantly from the Retail/Business Banking portfolio. However, this was partially compensated by higher recoveries and upgrades. The GNPA/NNPA ratio grew by 19bp/2bp QoQ to 5.15%/1.16%. PCR remains stable at 78.4%, the highest in the industry. Restructured loans stood controlled at 0.7% of loans (v/s 0.5% in FY21).

* ICICIBC holds COVID-19 related provisions of INR64.25b (~0.9% of loans), despite utilizing provisions of INR10.5b in 1QFY22. It guided at improved asset quality trends mainly from 2HFY22. We marginally increase our FY22E PAT estimate by 4%. We maintain our BUY rating.

Strong operating performance; provision coverage remains high

* ICICIBC reported a PAT of ~INR46.2b in 1QFY22 (12% above our estimate; +78% YoY), aided by healthy NII growth and lower provisions (23% below our estimate). Additional COVID-19 provision buffer stands at INR64.25b (~0.9% of loans) v/s INR74.7b (~1% of loans) in FY21.

* NII growth was strong at 17.8% YoY (up ~5% QoQ), led by an improvement in margin (up 5bp QoQ to 3.89%) and in line growth in advances (up ~17% YoY). Other income declined by 35% YoY as last year there were gains from stake sale in subsidiaries. However, core other income grew 56% YoY to INR37.1b, led by 53% growth in fee income. Retail, SME, and Business Banking contributed 76% to total fees. Opex grew 30% YoY (flat QoQ), enabling robust core PPOP growth of 23%.

* On the business front, advances growth was broadly flat sequentially (but up 17% YoY), with domestic book growing 19.6% YoY (0.3% QoQ). Among segments, Business Banking grew well (~6% QoQ), Retail loans were flat QoQ (up 20% YoY), while SME/Corporate declined by ~2% QoQ. Within Retail, Mortgage grew 2.4% QoQ, Unsecured Retail saw flat sequential trends, while CV/2W declined by 5%/9% QoQ. Till 17th Jul’21, the bank has disbursed INR132b (ECLGS 1.0), ~INR17b (ECLGS 2.0), and only ~INR1b (ECLGS 3.0) under the ECLGS schemes. On the liability front, deposit growth stood at 15.5% YoY, led by CASA (~25% YoY growth). Average CASA mix improved to 43.7% (120bp QoQ).

* Asset quality: Fresh slippages increased to INR72.3b (annualized ~4% of loans) v/s INR55.2b in 4QFY21. Fresh slippages are pre-dominantly from the Retail/Business Banking portfolio (~INR67.7b), while Corporate/SME slippages were contained at INR4.6b. Within Retail, INR9.6b/INR11.3b came from the Kisan Credit Card/Jewelry portfolio. It also witnessed some uptick in stress in the CV portfolio. Higher recoveries and upgrades in Retail/Business Banking of INR22.6b led to a mere ~4.3%/1.4% YoY rise in GNPA/NNPA. The GNPA/NNPA ratio grew by 19bp/2bp QoQ to 5.15%/1.16%. PCR improved slightly to 78.4%. Restructured loans rose to INR48.6b (0.7% of loans) v/s INR39.3b (0.5% of loans) in FY21, while the BB and below portfolio increased to ~INR139.7b (v/s INR131b in FY21).

Highlights from the management commentary

* The management expects gross NPA additions to be lower in 2Q and meaningfully decline from 2HFY22 onwards. It remains confident that its COVID19 provision buffer is sufficient to manage potential provisioning requirements.

* The private sector has not gone for any major capex expansion, while PSU entities see a capex revival. Their utilization rate has improved, and hence the rise in demand for working capital financing.

* The business banking portfolio is very well collateralized, while the SME portfolio is seeing some uptick in stress.

Valuation and view

ICICIBC reported a strong earnings performance, led by robust core PPOP performance and controlled provisions. The steady mix of high yielding portfolio such as Retail/Business banking portfolio, deployment of excess liquidity, and low cost liability franchise is aiding margin expansion. COVID 2.0 has disrupted collections, leading to elevated slippages in the Retail/Business Banking portfolio.

However, the management is confident of improved asset quality trends over FY22, mainly from 2H onwards. Restructured loans remain under control at 0.7% of loans. Provision coverage remains best in the industry and additional COVID-19 provision buffer (0.9% of loans) provides comfort on normalization in credit cost. We expect RoA/RoE to improve to 1.8%/15.3% for FY23E. We maintain our Buy rating with a revised SoTP-based TP of INR835/share (2.6x FY23E ABV for the bank).

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