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All-around solid performance and it can only get better

* Even amid higher opex and no Covid provision reversal, ICICI once again reported a beat on PAT at Rs55bn (est.: Rs51bn) - up 30% yoy on strong core profitability (up 23% yoy). This was driven by strong credit growth at 17% yoy (vs. HDFCB’s 15%), historically high NIMs at 4% (10bps short of HDFCB), strong fees and dividend, and better asset-quality outcomes.

* The bank has been delivering strong retail growth (20% yoy), while SME/BB growth is also robust now (albeit on a low base). Corporate growth should revive soon too. ICICI - armed with its strong product offerings, franchise network and superior digi-banking platform - should deliver better credit growth and thus core profitability as well (21% CAGR in FY22-24E).

* Asset-quality outcomes amid the pandemic were better than expected, with the GNPA ratio down 33bps qoq to 4.8%, while the restructured pool was contained at Rs97bn/1.3% of loans (vs. HDFCB’s 1.7%), with adequate provision buffer at 20% (vs. 10% required). Specific PCR remains peer-best at 80% of NPAs and Covid buffer at 0.8% of loans. This should keep LLP contained, and thus drive decade-best RoAs/RoEs at 1.7%-1.8%/14%-17% over FY22-24E.

* ICICI remains our top pick, given its consistent outperformance across business/financial parameters, higher retail/digital orientation, strong capital/provision buffers, and management stability/credibility (missing in some large private peers). Retain Buy and raise the TP (Dec’22) to Rs950 (2.7x Dec’23E standalone ABV + subs value of Rs196) from Rs825.

Multi-quarter high credit growth, so are margins:

Overall credit growth was at a multi-quarter high of 17.2% yoy/4% qoq (better than HDFCB’s 15% yoy), mainly driven by strong growth in the retail (up 20% yoy) and SME/BB portfolios. Retail growth was mainly led by mortgages, cards/PL and some pick-up in VF (ex-CV). The market share in cards improved further to 19% in CIF/18% in spends and should consolidate further with the onset of the festive season. ICICI Pay-later (noncard BNPL) product has also gained reasonable scale, complementing the strong card offering.

ICICI’s iMobile pay app, which offers payment & banking services to other banks’ customers too, has clocked strong activation from non-ICICI Bank customers (1.5mn activations in Q2, taking the total to 4mn since launch in Dec-20), creating a funnel for liability/asset cross-selling. NIM inched up to a historical high of 4% (up 43bps yoy/10bpq qoq), which could improve further, led by higher retail/SME/BB growth and re-pricing of mortgage portfolio when the interest rate cycle reverses.

Lower NPAs, limited restructuring, and strong provision buffer to reduce incremental LLP:

Gross slippages were down qoq to Rs56bn (Retail/BB: Rs46bn, mainly from CV/CE), and recoveries were equally strong at Rs55bn apart from w-offs, leading to a 33bps qoq reduction in the GNPA ratio to 4.8%. The restructuring pool rose by 60bps qoq to 1.3% of loans, but 95% of it is secured and well-provided (20% vs. 10% regulatory required) - offering comfort.

The incremental restructuring pipeline is just Rs10bn/0.13%. The bank expects limited relapse from the restructured pool and believes that any deviations from expectations could be managed by consuming contingent provisions, which stand high at 0.8% of loans. The FB/NFB o/s to performing borrowers rated BB & below was down to Rs127bn (1.6% of loans) from Rs140bn in Q1.

ICICI remains our top pick in the banking space:

We believe that better asset-quality experience despite the pandemic, cost advantages and superior digital capabilities built over years will help the bank clock better growth outcomes without compromising on quality/pricing. That said, strong provisioning buffers should help absorb any adversity without impairing profitability, unlike in the past. We expect the bank to clock decade-best RoEs of ~14%-17% over FY22-24E, driven by strong core profitability and a moderation in LLP.

Retain ICICI as Buy and top pick in the sector, with a revised TP of Rs950 (2.7x Dec’23E ABV + subs value of Rs196) vs. Rs825 earlier (2.5x Sep’23E core bank ABV + subs valuation of Rs170). In our view, increasing confidence in ICICI’s ability to deliver superior RoEs, further improvement in subsidiaries’ performance and management credibility leave scope for further re-rating. Key risks: 1) slow macro/consumption recovery hampering the bank’s growth/asset-quality normalization; and 2) top management attrition.

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