ICICI Bank Strong performance Stock Update Stock

Sector: Banks & Finance ICICI Bank posted strong Q2FY2020 results.Net interest income (NII) rise and fee income contributed to operating profit, helped by strong asset- Result Update quality performance. NII rose by 25.6% y-o-y to Rs. 8,057 crore (we expected a 24.2% y-o-y growth), while non-interest income increased Change by 32.9% y-o-y to Rs. 4,194 crore. Fee income growth was strong at á 16.1% y-o-y, augmented by retail fee, while net interest margin(NIM)

Reco: Buy á improved by 3 BPS q-o-q to 3.64%, overall registering strong operating CMP: Rs. 478 performance. A one-time impact due to write-down in deferred tax asset á (DTA) of Rs.2,920 crore impacted net profit to decline by 27.9% y-o-y

Price Target: Rs. 570 to Rs. 655 crore (we expected a de-growth of 48.3% y-o-y). However, á á Upgrade No change Downgrade asset-quality performance was strong with gross NPA (GNPA)/net NPA

á á (NNPA) declining by 31 BPS/24 BPS q-o-q to 6.90%/1.74%. Slippages for Q2FY2020 declined to Rs. 2,482 crore. We believe NPA cycle has Company details peaked off for ICICI Bank, and high PCR (excl. TWO at 76.1%) allows the Market cap: Rs. 3,08,513 cr bank to go easy on building provisions from here. Recent performance indicates that the bank is well on its way to close the gap on credit cost 52-week high/low: Rs. 482/327 performance with best-in-class peers. The bank has been focusing on retail growth; and investment in technology, branchesand controlled NSE volume: (No of 200.3 lakh shares) credit costs augur well for return ratios. ICICI Bank is well capitalised to tap opportunities and gain market share in the absence of significant BSE code: 532174 competition in several lending segments. We maintain our Buy rating with a revised SOTP-based price target (PT) of Rs. 570. NSE code: ICICIBANK Key positives Sharekhan code: ICICIBANK ŠŠ Sequential improvement in asset quality, while slippages declined to Free float: (No of 646.0 cr Rs. 2,482 crore versus Rs. 2,779 crore in Q1FY2020. shares) ŠŠ NIM improved by 3 BPS to 3.64% from 3.61% sequentially. Key negatives Shareholding (%) ŠŠ Rise in BB and below book in corporate and SME segments to Rs. 16,074 Promoters 0.0 crore as compared to Rs. 15,355 crore in Q1FY2020. FII 40.8 Our Call DII 40.4 Valuation – We value ICICI Bank by our SOTP methodology, where Others 18.8 we value the standalone bank at 2.2x its FY2021E BV and rest of the subsidiaries at ~Rs150 per share. We believe valuations are reasonable, considering overall franchisee as a whole and trends in improvement in Price chart asset quality. ICICI Bank is well capitalised (Tier-1 of 14.6%) to augment 600 healthy domestic loan growth trajectory going ahead. Strong retail-based 500 funding profile and controlled credit cost are likely to aid return ratios in 400 the medium to long term. We maintain our Buy rating with a revised SOTP- 300 based PT of Rs. 570. 200 100 Key Risks 19 19 19 19 19 19 18 18 19 19 19 18 19 ------Jul Jan Jun Oct Oct Apr Feb Sep Dec Aug Nov

Mar Any large chunky slippage from the corporate book, especially from BB and May below-rated portfolio, could impact earnings. Valuation (Standalone) Rs cr Price performance Particulars FY18 FY19 FY20E FY21E Net Interest Income (NII) 23025.8 27014.8 30520.5 36881.7 (%) 1m 3m 6m 12m Net profit (Rs cr) 6763.7 2970.8 9695.3 16814.3 EPS (Rs) 10.5 4.6 15.1 26.2 Absolute 4.5 12.9 15.6 49.1 P/E (x) 45.4 103.3 31.7 18.3 Relative to BVPS (Rs) 157.8 163.0 173.7 191.0 3.3 8.7 14.0 25.1 Sensex P/BV (x) 3.0 2.9 2.7 2.5 RoE (%) 6.6% 2.8% 8.7% 13.9% Sharekhan Research, Bloomberg RoA (%) 0.8% 0.3% 0.9% 1.3% Source: Company, Sharekhan Research October 29, 2019 5 Stock Update Stock

Key Concall highlights ŠŠ Focused on growing retail term deposits and CASA deposits on absolute terms ŠŠ Average CASA deposits increased by 10.9% y-o-y in Q2FY2020. On the asset side, the domestic loan book grew by 16.4% y-o-yon September 30, 2019, driven by retail loans, which grew by 22.2% y-o-y. ŠŠ Over the past year, the bank has taken a number of initiatives on the digital front to expand its customer base, smoothen the onboarding process further, enhance the transacting experience and deepen the penetration of its products and services among existing customers. ŠŠ Network expansion: The company intends to open ~450 branches in a year. 346 branches were opened during Q2FY2020. The bank added ~16,000 employees in the past 12 months. ŠŠ Gross NPA additions of Rs.2,482 crore during the quarter, PCR (ex-tech write-off 76.1%). ŠŠ Recently, the bankhas taken several steps to streamline growth engine in the SME segment, credit process and underwriting to improve turnaround time (TAT) and credit decision process. ŠŠ Rural focus:ICICI Bank partnered with CSC E-gov services India to expand its rural reach and extend its services. Nearly half of its existing branches are in rural and semi-urban areas. ŠŠ Corporate segment focuses on granularity, transaction banking and improving credit rating profile. ŠŠ NIM movements:Interest on income tax refund was Rs.42 crore, impact of interest on income tax refund was 2 BPS this quarter compared to 9 BPS in the previous quarter. Impact of interest collection from NPAs was 4 BPS during this quarter as compared to 8 BPS q-o-q. ŠŠ Fee income grew by 16.1% y-o-y; retail fee contributes to about 75% of overall fees. ŠŠ Dividend income included final dividend from ICICI Securities and ICICI Pru Life ŠŠ DTA impact: Due to reduction in corporate tax rate, there was a Rs. 2,920 crore one-time DTA impact. ŠŠ Management indicated that the portfolio brought from a troubled HFC is granular in nature, and the collection for the entire portfolio has been taken over by the bank. ŠŠ SME business (with turnover of less than Rs. 250 crore) grew stronglyby 30% y-o-y. ŠŠ Of the total corporate and SME slippages of Rs.1,159 crore, Rs. 413 crore were due to increase in o/s accounts that were classified as NPAs during earlier years. Of this Rs.413 crore,total Rs.349 crore was due to impact of foreign currency NPA due to currency depreciation. ŠŠ Non-fund based outstanding to non-performing loans was Rs. 3,371 crore at September 30 compared to Rs. 3,627 crore at Q1FY2020. The bank holds provisions of Rs. 1,343 crore as of September 30, against non-fund based outstanding to non-performing loans. ŠŠ Maintained credit cost assumption of 1.2%-1.3% for the year. ŠŠ The outstanding BB and below investment book was at Rs. 600 crore-700 crore. ŠŠ Slippages from BB and below-rated portfolio were Rs.373 crore. ŠŠ NBFC exposure:Management indicated that it doesnot have any material exposure or any large exposure into any of the companies, which are under stress or supposedly under stress. So,loans to NBFC and HFC were ~5% of total loans. ŠŠ Telecom Exposure: Has ~1.8% or Rs. 20,000 croreexposure to the telecom sector;it is predominantly to the top two players in the sector. ŠŠ Improvement in CET:RBI’s risk weight reduction on consumer loans led to 25 BPS positive impact of on CET-1.

Results (Standalone) Rs cr Particulars Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % Net interest income 8,057 6,418 25.6 7,737 4.1 Non-interest income 4,194 3,156 32.9 3,425 22.4 Net total income 12,252 9,574 28.0 11,163 9.8 Operating expenses 5,378 4,324 24.4 4,874 10.3 Pre-provisioning profit 6,874 5,250 30.9 6,288 9.3 Provisions 2,507 3,994 -37.2 3,496 -28.3 Profit before tax 4,367 1,255 247.9 2,793 56.4 Tax 3,712 347 971.2 885 319.6 Profit after tax 655 909 -27.9 1,908 -65.7 Source: Company; Sharekhan Research

October 29, 2019 6 Stock Update Stock

Outlook We find that a well-capitalised bank such as ICICI Bank is likely to see tailwind benefits of lower competitive intensity in the market as well as benefits of peaking of NPA cycle, now that it is behind it. Lower slippages as well as improved capitalisation enables it to see improvement in its return ratios and margins. Moreover, it allows the bank to grow its reach (346 new branches opened in Q2FY2020), important for its retail business growth. ICICI Bank has shown improving trends in key operating parameters with improving asset-quality outlook. Though some corporate exposures would be key to watch, we believe a large chunk of recognition has happened and NPA cycle has peaked largely and some resolutions in the pipeline can alleviate credit cost further. ICICI Bank is an attractive franchisee with good reach, well positioned to gain market share and its well performing subsidiaries also add value. We find the bank as a strong re-rating potential and, hence, expect it to see improved performance in the medium to long term. Valuation We value ICICI Bank by our SOTP methodology, where we value the standalone bank at 2.2x its FY2021E BV and rest of the subsidiaries at ~Rs150 per share. We believe valuations are reasonable, considering overall franchisee as a whole and trends in improvement in the asset quality. ICICI Bank is well-capitalised (Tier-1 of 14.6%) to augment healthy domestic loan growth trajectory going ahead. Strong retail-based funding profile and controlled credit cost are likely to aid return ratios in the medium to long term. We maintain our Buy rating on the stock with a revised SOTP-based PT of Rs. 570.

One year forward P/BV (x) band

3.2

2.4

1.6

0.8

- 13 15 17 19 15 17 19 14 16 18 ------Jun Jun Jun Oct Oct Oct Oct Feb Feb Feb

PBV +1 sd 3-yr Avg -1 sd

ICICI Bank SOTP valuation Rs. Valuation Methodology Value of Standalone ICICI Bank 420 2.2x Standalone FY2021E BV Non-Banking Subsidiary Valuation ICICI Bank Holding Value/share Life Insurance Subsidiary 52.9% 63 3.4x EV Q2 FY19A + 18% EVOP General Insurance Subsidiary 56.8% 50 30x FY21E PAT Securities business 79.2% 12 15x FY21E PAT Others 25 SOTP Valuation (Rs. per share) 570 Source: Company, Sharekhan Research

Peer Comparison CMP P/BV(x) P/E(x) RoA (%) RoE (%) Particulars Rs/Share FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E ICICI Bank 478 2.7 2.5 31.7 18.3 0.9 1.3 8.7 13.9 HDFC Bank 1242 4.1 3.5 26.0 20.7 1.9 2.0 16.5 18.2 Axis Bank 739 2.6 2.3 24.3 17.5 0.9 1.0 11.2 14.0 Kotak Mahindra Bank 1575 6.0 5.2 47.0 39.4 1.9 1.9 13.7 14.2 Source: Company, Sharekhan research

October 29, 2019 7 Stock Update Stock About company ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its group companies. It is the 2nd largest private sector bank in terms of loan book size, having a pan India presence . It subsidiaries, ICICI Prudential Life Insurance, ICICI Lombard General Insurance Company Ltd , ICICI Securities Ltd are all strong entities in their respective fields, and are developing well as a strong franchise, and provide support to overall value. In its banking business, It has continued to improve the portfolio mix towards retail and higher-rated corporate loans and has made significant progress in de-risking the balance sheet. Hence, today the proportion of retail loans in the portfolio mix has increased to 62%, while an increasingly high proportion of corporate loans disbursed are to customers rated A- and above, which helps de-risking of the overall loan book.

Investment theme The bank has built an attractive franchise consisting of Banking, Insurance, Securities business over the years. Since fiscal 2016, the bank has unlocked more than Rs. 14,000crore of capital in its subsidiaries, which not only demonstrates the value created, it has also resulted in value unlocking along with leaner balance sheet obligations for the parent. We believe the NPA cycle has peaked for the bank and going forward, we expect to see improved ROE/ROA by virtue of faster growth (waning of competition, adequate capital etc) as well as better profitability (lower slippages, lesser drag of provisions, resolutions/ recovery). It has continued to improve its portfolio mix towards retail (granular) and higher-rated corporate loans, and hence, in last four years, it has not only de-risked its balance sheet but also enhanced the franchise value.The bank is well placed to benefit from reduction in competitive intensity from NBFCs and recoveries/ resolutions from NCLT etc accounts would be further aid to ROE/ROA expansion.

Key Risks Any large chunky slippage from the corporate book, especially from BB and below-rated portfolio, could impact earnings.

Additional Data

Key management personnel Sandeep Bakhshi CEO/Managing Director Rakesh Jha Chief Financial Officer Vishakha V Mulye Executive Director Anup Bagchi Executive Director Source: Company Website

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Life Insurance Corp of India 7.9 2 Dodge & Cox 5.3 3 HDFC Asset Management Co Ltd 4.1 4 HDFC Trustee Co Ltd/India 4.0 5 SBI Funds Management Pvt Ltd 3.4 6 ICICI Prudential Asset Management 2.6 7 Reliance Capital Trustee Co Ltd 2.2 8 Capital Group Cos Inc/The 2.0 9 Aditya Birla Sun Life Trustee Co P 2.0 10 Franklin Resources Inc 1.9 Source: Bloomberg

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October 29, 2019 8 Know more about our products and services

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