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Sound credit growth; higher provision and lower treasury income dragged profitability

Result and Price Analysis

Earnings in 1QFY23 re-acknowledge our conviction that ICICI Bank is maintaining a sustainable and prudent growth led by tech-driven initiatives. The bank has reported its 1QFY23 results with the key pointers being: 1) Strong NII growth of 21% yoy, with headline NIMs (Domestic: 4.14% & Overall: 4.01%) stable sequentially despite higher liquidity available (LCR: 126%). 2) PPOP growth flat sequentially driven by lower treasury income, 3) Reported slippages (?58bn) higher sequentially, 4) NNPA ratio improved further at 0.7%, 5) PCR (excluding technical write-offs) stood at 79.9%. The Bank made ?10.5bn of additional contingent provision. However the bank didn’t include contingent & floating provision (~?187bn) in PCR calculation; 7) Contingent provision (excluding PCR) stood at 2.1% of the loan book, 8) BB & below exposure down sequentially to 0.9% of net advances, 9) the bank’s net advances grew by 21.3% yoy and 4.3% sequentially; and 8) deposits stood at ?10.5tn mark and degrew sequentially with 60bps improvement in average CASA at 45.8%. Moreover, provision expenses inched up sequentially to ?11.4bn v/s 10.7bn in 4QFY22. Factoring stable balance sheet growth and credit cost of 1% in FY23E, we estimate the bank’s FY23E ROA and ROE of 1.8% and 15% respectively. We have positive outlook on the bank with BUY rating.

Gazing the Core

Asset quality improved further, restructuring book eased: Slippages were up at ?58bn v/s ?42bn in the previous quarter. Retail slippages and Corporate & SME slippages contributed 86%, and 14% respectively. Considering significant contribution, retail slippages up 35% sequentially. The standard restructured (0.8% of portfolio) book inched down sequentially at ?74bn. Retail book contributed ~74% of restructured pool (Over 95% are secured), where rest is from corporate and SME book. The bank carries provision worth ?17bn (~23% covered) against the restructured pool. The absolute GNPA decreased by 2.2% sequentially led by higher upgrades & recoveries

As on 1QFY23, the bank’s GNPA/NNPA/PCR stood at 3.41%/0.7%/80% against 3.6%/0.76%/79% in the previous quarter. The bank witnessed moderate reduction in GNPA ratio as well as the NNPA. With stable stress level, the total provisioning expenses marginally up sequentially and stood at ?11.4bn v/s ?10.7bn in the previous quarter. The total contingent provisioning stood ?85bn. The total additional provision contain contingent provision (?85bn), General Provision (?59bn) and Provision on Non-fund based NPA (?21bn). The PCR including all provisions (Cumulative + General + Contingencies) stood at 136.5% of GNPL. The contingent provision (excluding PCR) stood 2.1% of loans. The management expects the standard asset contingent provision to be adequate for facing the stress emerging from restructuring. The bank’s BB & below rated pool came down (?82bn v/s ?108bn) contributes 0.9% of total customer assets.

Profitability dragged because of higher provision and lower treasury income: The bank’s quarterly NII stood at ?132bn; grew by 21% yoy and 5% sequentially driven by improved domestic NIMs at 4.14%. Overall NIMs flat at 4%. The bank’s 30% loans are fixed rate and remaining linked with external benchmark. Non-interest income de-grew by 1.5% sequentially because of lower treasury income. Excluding treasury income, it grew by 25% yoy. The PPOP stood at ?103bn; flat sequentially owing to lower treasury income. With sequentially higher provisioning expenses (?11.4bn v/s ?10.7bn) the bank reported PAT of ?69bn; grew 50% yoy and 1.6% sequentially. The banks ROA/ROE stood at 2%/16%.

Sound credit growth; SME book lagged: With the increase in economic activity; disbursement across retail products increased substantially. The bank’s advances stood at ~?9tn; 21.3% yoy and 4.3% qoq. Domestic advances grew 22% yoy. Domestic advances (95% contribution) grew by 4% qoq. Foreign advances grew by 11% qoq. Retail advances (68% contribution) grew by 4.7% qoq. SME advances (4.4% contribution) de-grew by 2.6% qoq. Corporate advances (22.6% contribution) grew by 4.4% qoq. In retail book; Personal loan & Credit card segment (15.7% of retail book) grew at 9.6% sequentially. 85% of the unsecured retail book customers are salaried. Home loan (50% of retail book) grew by 4% qoq while Vehicle loan (11.5% of retail book) grew by 3.2% qoq. The bank’s deposit stood at ?10.5tn mark and grew by 13.4% yoy and de-grew by 1.3% sequentially. The Avg. CASA inched up 60bps to 45.8%.

Outlook & Valuations

We expect its loan book to grow at CAGR of 20% over FY22-24E, led by technology initiatives. The credit cost normalization is underway. We estimate return ratio ROA/ROE of 1.8% and 15% in FY23E. We value the standalone entity with 2.8xFY24E BVPS (?320) and of investment in subsidiaries and JVs (?138 per share); we arrive at a target price of ?1,033. We recommend BUY rating with a potential upside of 29%.

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