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Leadership position to strengthen; Tech capabilities to drive sustainable growth

RoA to reach 2% milestone by FY24E; re-rating to continue

* ICICIBC has been the best performer in the Banking sector (despite the consensus Buy tag) as it delivered 80%/42% returns over FY21/FY22 YTD. Its market capitalization ranking within the BFSI space has improved to two from five in FY18.

* Stability of the top management has helped improve its operational performance. Mr. Sandeep Bakhshi's appointment as CEO has brought stability which enabled value creation and drove re-rating as bank delivered 31% CAGR in m-cap since FY18- 21 v/s 7% over FY10-18.

* It has reported strong progression in NIMs, narrowing the gap with sector leaders. With a higher mix of floating rate loans and our view on a reversal in the rate cycle, we expect portfolio yields to remain steady, driving 20% CAGR in NII over FY21-24E.

* NNPA declined to sub-1% – the lowest level since Dec'14 while PCR has improved to ~80.3% – among highest in the industry. We estimate GNPA/NNPA ratio to moderate to 3.8%/0.7%, while Prov./PPOP ratio sustains ~25% over FY22-24E.

* We expect it to deliver 18%/20% CAGR in loans/PPOP over FY22-24E, while RoA reaches the 2% milestone. We reiterate ICICIBC as our top Buy with a TP of INR1,100.

Growing profitability reflecting in improved m-cap rankings

ICICIBC has delivered 34% earnings CAGR over FY18-21 v/s a 15% decline over FY15- 18. This has enabled 31% CAGR in m-cap over FY18-21. During FY21/FY22 YTD, the stock has returned 80%/42%, making it one of the best performers in the Banking sector. Consequently, its m-cap rankings within the BFSI space improved to second from fifth in FY18. ICICIBC’s share in total Private Banks’ m-cap under our coverage rose to 20% from 11% in FY18. We expect the bank to deliver 28% earnings CAGR over FY21-24E. This will enable its continued outperformance vs. its peers and further raise its m-cap contribution in the Private Banking space, in our view.

Management continuity aiding operational performance

ICICIBC delivered a steady performance amid an uncertain economic environment. The bank has prudently addressed gaps (asset quality issues, liability franchise, and high foreign exposure) and simultaneously invested in the business (Retail franchise, digital capabilities, and branches) to deliver industry-leading growth in its focused segments. The stability of top management under the able guidance of Mr. Bakhshi has significantly helped improve operational performance at a time when other private peers have witnessed changes across several management layers. Mr. Bakhshi’s appointment as CEO has brought stability which enabled value creation and drove rerating as bank delivered 31% CAGR in m-cap since FY18-21 v/s 7% over FY10-18.

Growth trends getting broad-based, expect ~18% CAGR in loans over FY22-24E

ICICIBC has seen steady growth (17% CAGR) in its Retail portfolio over the past three years. This has enabled 12% growth in overall loans. The rundown in the overseas portfolio and sluggish trend in the Corporate book acted as a drag on overall loan growth. With the mix of overseas book declining to ~5% and the outlook on Corporate loan growth improving, we estimate ICICIBC to deliver 18% CAGR in loan growth over FY22-24E.

* ICICIBC has grown its Mortgage book at 18% CAGR over the past three years, implying ~24% incremental market share v/s ~11% in overall loans.

* Over FY18-21, it has grown its card portfolio at 28% CAGR while spends grew at 21% CAGR (v/s 11% CAGR for the industry).

* Growth in Business Banking & SME portfolio has accelerated to over 40% YoY, aided by a smaller base and customized digital innovations (Insta apps).

* Corporate growth remains modest however management expects growth to recover during FY23, aided by an improvement in capacity utilization levels.

Margin has improved sharply; expect trends to remain steady

ICICIBC has reported strong progression in NIMs, with margin improving by 67bp over the past three years to 4% at present, narrowing the gap with sector leaders. This occurred even as the mix of Mortgages increased to 35% as the bank prudently reduced the mix of overseas loans and significantly strengthened its liability franchise. It reported a 153bp reduction in the cost of deposits over the past two years and currently has one of the lowest deposit cost at 3.53%. With a higher proportion of a floating rate loan book and our stance of a turn in the rate cycle with RBI likely to increase the repo rate by 50bp in FY23E, we estimate portfolio yields to improve, resulting in steady margin. We expect 20% CAGR in NII over FY21-24E.

Gaining market share through technological innovations

ICICIBC has been consistently strengthening its digital capabilities to help transform itself and increase throughput rates, while offering customers a superior experience. The bank has been reporting strong growth in Retail advances, supported by an impressive share of digital originations, while SME/Business Banking growth has been robust, aided by various digital applications (Insta apps). Digital disbursals in Home/Personal/Auto loans have thus grown by 2.5x/1.7x/4.2x YoY over YTD Oct’21.

* ICICI's mobile app is showing robust growth with 4.5m activations from non ICICI users. It has cross-sold at least one product to 10% of these customers.

* ICICI has been the largest Credit Card acquirer with a digital sourcing rate of 96% (100% since Nov’21). It added ~2m Credit Cards via its partnership with Amazon (1m cards added in FY21 alone), with 60% of customers being NTB.

* About 94% of Personal loans are extended digitally, with Insta PL accounting for ~38% of cases, while 48% has been coming through ‘do it yourself’.

* ICICIBC is working with over 130 fintechs and has invested in ~15 startups over the past two years to drive transformation across business verticals.

Asset quality robust; expect credit cost to moderate to 1.1% by FY24E

ICICIBC has reported strong trends in asset quality over the past few years, with the NNPA ratio declining to sub-1% – the lowest since Dec’14. Slippages from Corporate & SME portfolio have subsided significantly, reflecting an improvement in underwriting standards. PCR has seen a sharp improvement to 80.3% – among the highest in the industry. The restructured portfolio stands controlled at INR96.8b (1.3% of loans), while a COVID-19 provision buffer (0.8% of loans) provides comfort. BB and below book too accounts for 1.7% of loans. ICICIBC is using more than 100 variables to assess risk and its Pre-Delinquency Management model is able to predict 80% of the bounce rate. This helps to identify early stress and contactless collection stands at ~30% of early stage delinquency. We expect GNPA/NNPA ratio to moderate to 3.8%/0.7% by FY24E and Prov./PPOP ratio to sustain ~25% over FY22-24E.

RoA to reach 2% milestone by FY24E; re-rating to continue

ICICIBC has been reporting a robust performance, led by strong core PPOP, controlled provisions, and steady asset quality. A healthy mix of the high yielding portfolio (Retail/Business Banking) and a low cost liability franchise is aiding margin expansion. The bank is witnessing strong recovery across key segments such as Retail, SME, and Business Banking. We estimate ICICIBC to deliver 20% CAGR in PPOP over FY22-24E, while RoA reaches 2% milestone. It has a strong capitalization with a Tier I of 17.3%, which will support healthy loan growth. We reiterate ICICIBC as our top Buy in the sector with a TP of INR1,100 (2.9x FY24E ABV).

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