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Strong all-round performance; growth outlook getting stronger

Robust asset quality + high prudential provisioning provides comfort

* ICICIBC reported a strong 3QFY21, with earnings driven by steady revenue growth, controlled opex, and lower provisions. Loan growth is showing a strong revival in both Wholesale, SME, and Retail, with disbursement in many business segments crossing pre-COVID levels, led by festive demand, improving economic outlook, and strong digital ecosystem build by the bank across business segments.

* On the asset quality front, controlled slippages led to a 6bp QoQ rise in the pro forma GNPA ratio, while total restructuring stood at 0.4% of loans (v/s 1% guided earlier). Pro forma PCR stood ~78%, the highest in the industry. It holds unutilized COVID provisions of INR64.7b (~1% of loans), offering comfort on normalization in credit cost. We raise our FY21E estimate by 20% due to lower credit cost while largely maintaining our FY22E/FY23E estimates. Maintain BUY.

Strong operating performance and lower provisions drive earnings

* ICICIBC reported a PAT of INR49.4b (above our estimate), supported by treasury income and controlled provisions (8% QoQ decline). It has made contingent provisions of INR30b for pro forma slippages and utilized COVID-related provisions of INR18b. It still holds unutilized COVID provisions of INR64.7b (~1% of loans). During 9MFY21, NII/PPOP grew 17%/35%, while PAT grew by 76% YoY to INR117.9b.

* NII stood at INR99.1b (16% YoY, in line) led by recovery in loan growth and 10bp QoQ improvement in margin to 3.67%. Other income grew 16% QoQ to INR46.9b as core fees grew 15%, driven by a revival in retail loans (7%) and normalization in cards spends. Retail contributed 78% of total fees. Other income was supported by strong treasury gains of ~INR7.7b. Opex grew 4% YoY, enabling core PPOP growth of 15%.

* Advances growth was robust (7% QoQ), with domestic book growing 7.5% QoQ, led by strong revival across business segments. Retail/Corporate grew ~7%/8% QoQ, while SME grew 16% QoQ. It has disbursed INR126b under ECLGS (till 27 Jan’21). Deposit growth stood at 22% YoY, led by term deposits, which grew ~26%. Average CASA mix improved to 41.8% (v/s 40.3% in 2QFY21).

* Asset quality: Fresh slippages stood at INR73.4b (including pro forma slippages). Pro forma GNPA/NNPA ratio increased to 5.42%/1.26%, with pro forma PCR at 77.6%. Total restructuring under the RBI resolution framework was ~INR25.5b (0.4% of loans). The bank made provisions of INR3.85b. ICICIBC does not expect any further rise in its restructuring pool. The BB & below portfolio increased to ~INR181b (v/s INR162b in 2QFY21), which includes Corporate and SME restructuring of INR17.1b.

Highlights from the management commentary

* A large proportion of slippages have come from the Retail portfolio. The management expects higher slippages in 4QFY21, but sees slippages and credit cost normalizing from FY22 onwards.

* Retail overdue book is 1.5% higher than pre-COVID levels (v/s 4% in 2QFY21).

* ICICIBC is not targeting any mix between Retail, Corporate, and SME portfolio.

Valuation and view
ICICIBC reported a strong 3QFY21, led by robust operating performance, while strong asset quality trends enabled decline in provisioning expenses. Loan growth is showing a strong revival in both Wholesale and Retail, with disbursement in many business segments surpassing pre-COVID levels. Asset quality remains under control, with controlled slippages and total restructuring at 0.4% of loans. Provision coverage remains best in the industry and the bank holds additional unutilized COVID provisions of INR64.7b (~1% of loans), providing comfort on anticipated normalization in credit cost. Liability franchise continues to improve with cost of deposits declining to 4%, while the Balance Sheet remains fairly liquid and thus conducive for growth. We expect RoA/RoE to improve to 1.8%/15.2% for FY23E. Maintain Buy with a revised SoTP-based TP of INR700/share (2.4x Sep-22E ABV for the bank)

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