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Buy ICICI Bank Ltd For Target Rs.735

ICICI Bank (ICICIB) reported better than expected profit of Rs44 bn in Q4FY21 on the back of strong NII growth, contained OPEX and sharp decline in provisioning. Interest cost declined -8.3% YoY which provided a strong boost to NII which grew by 16.9% YoY, above our estimates. Other income remained weak due to decline in treasury income, though fee income witnessed improvement (6% YoY). NIM expanded significantly by 17bps sequentially to 3.84% mainly driven by healthy NII growth due to -8/+1 bps QoQ movement in CoF/YoA. Domestic NIM moved back to ~4% (3.94%) from 3.78% in Q3FY21. On business growth front, credit growth further improved to 11.5% YoY with sustained sequential pick up in corporate portfolio.

Gross slippages reported at Rs118.2 bn (proforma slippages of Rs83 bn in Q3) which came mainly due to retail slippages of Rs99.6 bn. As per mgmt, higher slippages from retail segment was on account of seasoning of portfolio which would normalize. Meanwhile we drive comfort from building strength in corporate portfolio with continued lower slippages from this segment (Rs18.6 bn in Q4). We expect lower corporate NPAs because of higher recognition of NPAs over the past years and underwriting to better rated corps (73% of loan book rated A or above as of Q4).

GNPA/NNPA improved to 4.96%/1.14% (from proforma of 5.42%/1.26% in Q3) with PCR at 77.8%, one of the best in the industry. Standard provisions at Rs141 bn including Rs75 bn of Covid related provision (Rs10 bn of contingent provisions made during the quarter) stood at 1.9% of loans thus providing comfort from the possible impact of second Covid wave. Restructuring book stood at 0.5% of loans by Q4 (0.4% in previous quarter) while the share of BB & below rated book also reduced to 1.8% of loans (2.0% of loans in Q3).

The impact of Covid second wave would be seen in next quarter as it may impact the collection efficiency. Though, higher secured nature of retail portfolio provides comforts. Further building strength in corporate portfolio is encouraging. Restoration of corporate credit growth, likely contained slippages and higher standard provisions will help to immune & boost profitability. We maintain ‘Buy’ rating to ICICIB with revised target price of Rs735 (valuing standalone business at Rs595 derived at +1SD P/ABV of 2.4xFY23E ABV. Subsidiaries are valued at Rs140).

NII growth remains strong driven by decline in CoF

ICICIB reported 16.9% YoY growth in NII because of the lower interest cost. Interest expenses declined by -8.3% YoY as CoF reduced by 8 bps QoQ. Interest income on the other hand rose by 3.4% YoY providing boost to NII. NIM improved by 17 bps to 4-quarter high of 3.84% in Q4FY21. Other income, however, contracted by -3.4% YoY due to negative treasury income as yield increased during the quarter. C/I rose to 41.3% in Q4 v/s 39.6% in Q3 primarily due to weak other income. Provisioning however declined by -51.7% YoY thus providing a boost to PAT which rose to Rs44 bn in Q4FY21.

Advances growth pick-up; Corporate credit growth improves to double digit

Advances grew by 11.5% YoY on the back of strong growth in retail and SME segments. Retail credit grew by 19.9% YoY driven by housing (21.7% YoY), rural loans (26.9% YoY) and business banking (40.5% YoY). Corporate credit growth further improved to 10.1% YoY from 6.5% YoY in Q3 as with low CoF bank remains able to leverage short-term corporate opportunities. Deposits grew by 21% YoY within this, CASA grew by 24.1% YoY and term deposits by 18.4% YoY. CASA share improved to 46.3% in Q4FY21.

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