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All-round beat; continues to set the benchmark for excellence

* ICICI Bank reported a 7% beat on PAT at Rs69bn (up 50% yoy), driven by a healthy core PPoP at 19% yoy (HDFCB: 15%), coupled with a lower treasury hit and LLP. Asset quality continued to improve, with the GNPA ratio down 19bps qoq to 3.4%, while the bank carries an industry-best PCR of 80% and contingent buffer of 0.9% of loans.

* The bank continued to clock strong credit growth at 21% yoy/4% qoq, led by retail growth of 24% yoy and BB/SME, supporting high loan yields, and thus leading to high margins of 4%. We believe that margins may further improve given the bank’s strong growth, increasing share of retail portfolio, including unsecured loans, and higher floating rate book, which all could support core-operating profitability (20% CAGR over FY22-25E).

* As per management, higher slippages in Q1 at Rs58bn/3.2% were mainly due to the seasonal stress in the KCC portfolio, and should reverse, while recovery trends are improving. That said, the bank has made additional prudent contingent provisions of Rs10.5bn, given rising systemic disruption, and it should help keep incremental LLP under check. We are raising our FY23-25 earnings estimates by 1-3%.

* ICICI continues to outperform its large peers on core-profitability, led by better margins/fees and cost management, while lower LLP should lift RoEs to a historical high of 17%. Valuations remain reasonable at 2x FY24E ABV, stripping off subsidiaries’ value. ICICI Bank remains our top pick in the banking space. Maintain Buy with a TP of Rs1,025 (valuing core bank at 2.7x Jun’24E ABV and subs value at Rs202).

Strong growth across segments supports all-time high margins:

ICICI reported better credit growth at 21% yoy/4% qoq, mainly led by retail, SME and BB segments. Within retail, mortgages and unsecured loans, including cards/PL, continued to grow at a strong pace. That said, growth in the CV book is still subdued and should accelerate, as can be been seen with other banks. Despite some moderation in the CASA ratio to 47% (seen in the case of HDFCB as well), the bank reported a steady CoF and thus margins stood at 4%. Given the bank’s continuous focus on growing its high-margin retail book, including unsecured loans (though on a low base) and a higher share of floating-rate book at 70% (43% linked to Repo, 21% to MCLR and 6% to other external benchmark), we expect further improvement in margins.

Asset quality improves, while the bank continues to build strong counter-cyclical buffers:

Gross slippages were higher than expected at Rs58bn/3.2% of loans due to higher stress in the KCC card portfolio (Rs7.6bn) as seen across banks. However, strong recovery/upgrades led to a 19bps qoq reduction in the GNPA ratio to 3.4%. The restructured pool also declined 20bps qoq to 0.8% of loans, for which the bank holds a provision cover of 23%. The bank continues to strengthen its B/S, as it additionally made a contingency provision of Rs10.5bn, with the contingency buffer now at Rs85bn/0.9% of loans (the highest among large banks). The FB/NFB exposure rated below BB also declined qoq to Rs82bn/0.9% of loans from Rs108bn/1.2% of loans in Q4, mainly due to upgrades.

ICICI remains our top pick in the banking space:

ICICI Bank continues to outperform its large peers on core-profitability, led by better margins/fees and cost management, while lower LLP should boost its RoEs to a historical high of 17%. Valuations remain reasonable at 2x FY24E ABV, stripping off subsidiaries’ value. Retain Buy with a TP of Rs1,025 (valuing core bank at 2.7x and subs value at Rs202). Any potential one-off gains from the ICICI Lombard stake sale to meet regulatory guidelines could further bolster RoEs. Key risks: 1) slow macro/consumption recovery hampering the bank’s growth/asset-quality improvement; and 2) top/middle management attrition amid rising poaching by peers/fintechs.

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