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Result Highlights

* Asset quality: Annualized slippage ratio for 1QFY22 was elevated at 3.9%, but management flagged decline for 2QFY22 and significant decline for 2HFY22

* Margin picture: NIM at 3.89% was up 5 bps QoQ, benefiting marginally from liquidity drawdown as well as higher yield on surplus liquidity

* Asset growth: Advances grew 0.7%/17.0% QoQ/YoY driven by home loans and business banking

* Opex control: Total opex inched up 0.6% QoQ driven by employee expenses, which grew 18.2% QoQ even as other opex de-grew -8.3% QoQ

* Fee income: Core fee income declined -15.6% QoQ, expectedly, even as management expected minimal impact from the ban on Mastercard

Our view – Elevated slippages largely a single-quarter phenomenon

ICICI’s internal assessment led to a drawdown of Covid provisions rather than an enhancement:

Given that ICICI’s provisioning policy post-pandemic has been admirably conservative going back to 4QFY20, we regard the drawdown of Covid provisions worth Rs 10bn as a relatively benign internal assessment of underlying stress. Even so, ICICI made NPA provisioning policy stricter, leading to a one-time provisioning charge of Rs 11.27bn. Of the NPA addition of Rs 72.31bn, Rs 67.73bn emerged from the retail and business banking book. Jewel loan slippages worth Rs 11.3bn are expected to be fully recovered. KCC slippages of Rs 9.61bn are also largely seasonal. Recoveries and upgrades were healthy at Rs 36.27bn, driven by ~90% digital collections. Restructured book rose somewhat to Rs 48.6bn compared with Rs 39.3bn as of 4QFY21. Most of the restructuring is from the secured book with low LGD and more restructuring is round the corner, with recourse to asset classification upgrades.

Management did not sound particularly confident on further NIM expansion from hereon:

Management cited 2 risks on the yield side: (1) competitive pressure (2) risk of RBI lagging in rate hikes vis-à-vis rise in cost of deposits. However, they also stated that, over the rate cycle, the net impact will be minimal.

Home loans grew 2.4% QoQ whereas business banking delivered standout growth of 6.3% QoQ:

Other key parts of retail lending displayed de-growth with vehicle loans and credit cards declining -2.6% QoQ and -0.9% QoQ, respectively. Personals loans were flat QoQ. Overseas loans grew 6.7% QoQ on the back of India-linked trade finance.

We maintain ‘Buy’ rating on ICICI with a revised price target of Rs 859:

We value the standalone bank at 2.5x FY23 P/BV for an FY22E/23E/24E RoE profile of 12.5/13.9/15.2%. We assign a value of Rs 190 per share to the subsidiaries, on SOTP.

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