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Strong show continues

Robust business momentum; PCR improves to 80%

* ICICIBC reported a strong 2QFY22, led by healthy NII growth (11bp NIM expansion), strong fee income trends, and controlled provisions. The bank reported a 5%/9% beat to our PPOP/net earnings estimate and is progressing swiftly towards earnings normalization.

* Business growth has picked up sharply, with domestic loans growing 4% QoQ, led by Business Banking (12%), Retail loans (5%), SME (11%). Most Retail segments showed a robust pickup, with Mortgage up 6% QoQ. A sharp recovery was seen in the Unsecured portfolio, with Personal loans/Credit Card growing by 6%/16% QoQ.

* On the asset quality front, fresh slippages declined to INR55.8b (2.9% annualized) v/s INR72.3b in 1QFY22. Higher recoveries and upgrades led to a 33bp/17bp QoQ decline in GNPA/NNPA ratio to 4.82%/0.99%. PCR improved to 80.3% – the highest in the industry. Restructured loans rose to INR96.8b (1.3% of loans) v/s INR48.6b (0.7% of loans) in 1QFY22.

* ICICIBC holds COVID-19 related provisions of INR64.25b (0.8% of loans), which gives us comfort on stable credit cost trends. We increase our estimates for FY22/FY23 by 5%/2.5% and project RoA/RoE of 2%/16.6% by FY24E. ICICIBC remains our top pick in the sector.

Beat across all fronts; PCR touches 80% levels

* ICICIBC reported a robust performance, with PAT up 30% YoY to INR55b (9% above our estimate), aided by healthy NII growth, strong fee income trends, and controlled provisions. Additional COVID-related provisions stand at INR64.25b (0.8% of loans), similar to 1QFY22 levels.

* NII growth was robust (up 25% YoY and 7% QoQ), led by a margin improvement (up 11bp QoQ) to 4% and an in line growth in advances (up 17% YoY and 4% QoQ).

* Other income came in 10% higher than our estimate, up 19% YoY to INR48b, led by strong fee income growth (21%). Retail, SME, and Business Banking contributed 78% to total fees. The bank reported treasury gains of INR3.97b (down 27% YoY). OPEX grew 28% YoY and 9% QoQ.

* PPOP grew 20% YoY, while core PPOP growth stood robust ~23% YoY. NII/core PPOP/PAT grew by 21%/23%/48% YoY in 1HFY22.

* On the business front, advances growth picked up sharply (up 3.6% QoQ and 17% YoY), with domestic book up 19% YoY and 4% QoQ. Among segments, Business Banking grew 12% QoQ, Retail loans rose 5% (+20% YoY), SME segment also picked up strongly at 11% QoQ, while the Corporate book declined by 1% QoQ. Within Retail, robust growth was witnessed in Mortgages (up 6% QoQ). A sharp recovery was seen in the Unsecured portfolio, with Personal loans/Credit Card growing by 6%/16% QoQ, while CV declined by 1.2%. On the liability front, deposit growth was robust 17% YoY and 6% QoQ, led by CASA (up 24% YoY). Average CASA mix improved to 44.1% (+40bp QoQ).

* On the asset quality front, fresh slippages declined to INR55.8b (2.9% annualized) v/s INR72.3b in 1QFY22. Fresh slippages were predominantly from the Retail/Business Banking book (INR46.2b), while the Corporate/SME slippages were contained at INR9.5b. On the other hand, higher recoveries and upgrades in Retail/Business Banking of INR51.78b led to a 4% decline in absolute GNPAs. The GNPA/NNPA ratio fell 33bp/17bp QoQ to 4.82%/0.99%. Current NNPA ratio levels are at the lowest levels since Dec’14. PCR improved further to 80.3% (~190bp QoQ improvement) – the highest in the industry.

* Restructured loans increased to INR96.8b (1.3% of loans) v/s INR48.6b (0.7% of loans) in 1QFY22. Total provisions on the restructured portfolio stands at INR19.5b (20%). BB & below portfolio declined to INR127b (1.7% of loans) v/s INR139.7b in 1QFY22.

Highlights from the management commentary

* With an increase in economic activity, disbursements across the Retail segment has improved sharply. Disbursements in Personal and Vehicle loans have reached Mar’21 levels.

* Private Corporate is not witnessing capex demand in a big way, while good traction is being witnessed in the PSU space.

Valuation and view

ICICIBC reported a strong 2QFY22, led by strong core PPOP performance, controlled provisions, and robust asset quality, with NNPA ratio (less than 100bp) at the lowest level since Dec’14. The steady mix of a high yielding portfolio (Retail/Business Banking) and a low cost liability franchise is aiding margin expansion. The bank is seeing a strong recovery in business trends across key segments such as Retail, SME, and Business Banking. The Retail and Rural segment is showing robust trends, barring Commercial Vehicles. On the asset quality front, slippages have moderated, and the management expects 2HFY22 to be much better. Provision coverage ~80% remains the best in the industry. The additional COVID-19 provision buffer (0.8% of loans) provides a comfort on credit cost. Restructured loans increased to 1.3% of loans. The bank carries 20% provisions on this portfolio. We increase our estimates for FY22/FY23 by 5%/2.5% and expect RoA/RoE to improve to 2%/16.6% by FY24E. We maintain our Buy rating with a revised SoTP-based TP of INR1,000/share (2.8x Sep’23E ABV for the bank). ICICIBC remains our top pick in the sector.

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