ICICI Bank Strong performance, attractive franchise

Powered by the Sharekhan 3R Research Philosophy Banks & Finance Sharekhan code: ICICIBANK Result Update Update Stock

3R MATRIX + = - Summary Right Sector (RS) ü Š ICICI Bank posted strong Q4FY2021 results with core operational performance coming higher than expectations, lower-than-expected slippages and sequentially improving Right Quality (RQ) ü asset quality are key positives. Š GNPA/NNPA ratio improved to 4.96%/1.14% (versus pro forma GNPA/NNPA of 5.42%/1.26% Right Valuation (RV) ü in Q3FY2021) and watchlist book declined; management commentary was positive and indicated strong growth in FY2022E. = - + Positive Neutral Negative Š The bank is available at 2.4x/2.1x its FY2022E/FY2023E BVPS. The stock has corrected by ~16% from its highs, and we believe valuations are attractive. What has changed in 3R MATRIX Š We maintain Buy rating on the stock with a revised SOTP-based PT of Rs. 800.

Old New ICICI Bank posted strong Q4FY2021 results with core operational performance coming higher than expectations, lower-than-expected slippages, and sequentially improving asset quality RS  being key positives. The quarter saw core operating performance above expectations with NII growth at 16.8% y-o-y, led by recovery in loan growth and NIMs improving by 17 bps q-o-q RQ  to 3.84%. Strong traction in advances growth was seen with domestic loan growth posting 18% y-o-y growth. Going forward, as the bank looks to build on growth with a focus on a well- RV  rated book, pickup in advances, and opex/credit cost will be key support and positives. ICICI Bank’s lower-than-expected slippages (both retail and corporate) imply the bottoming out of the past five years of credit cycle, which is encouraging for the outlook. On the asset-quality Reco/View Change front, sequential improvement in GNPA/NNPA ratio was seen to 4.96%/1.14% compared to pro forma GNPA/NNPA ratio of 5.42%/1.26% in Q3FY2021. Restructured loans were well Reco: Buy  controlled at ~50 bps of loans. We find sequential slippages and higher recovery and upgrades healthy, with BB and below book declining on a sequential basis. Management commentary CMP: Rs. 570 was positive and indicated strong growth in FY2022E and traction from retail and (well rated) corporate to aid market share gains. ICICI Bank still holds a COVID-related provision buffer Price Target: Rs. 800 á of Rs. 7,475 crore, despite utilising provisions of Rs. 3,510 crore during Q4FY2021, which provides comfort for profitability and will aid normalisation in credit cost. Even though the á Upgrade  Maintain â Downgrade second wave, surge in COVID-19 cases, and the resultant impact on economic activity are key monitorables, aided by the vaccination drive and better equipped response, we expect strong entities to likely overcome near-term challenges. We have increased our earnings forecast for Company details FY2022E and FY2023E, factoring in better growth and lower credit risk burden. We find the Market cap: Rs. 394,315 cr improving granularity of the book provides better earnings visibility for ICICI Bank. Hence, we expect the stock to have further re-rating potential. We maintain Buy with a revised SOTP- 52-week high/low: Rs. 679 / 286 based price target (PT) of Rs. 800. NSE volume: Key positives 299.2 lakh Š PCR robust at ~77.7% is one of the highest among peers and is a positive cushion for profitability. (No of shares) The bank also holds excess provisions of 1%+ of loans to mitigate any large impact. BSE code: 532174 Š Strong traction on the growth front, with domestic loans growing by 17.7% y-o-y and 6.1% q-o-q; retail loans growing by 19.9% y-o-y and 6.6% q-o-q; and domestic performing corporate NSE code: ICICIBANK portfolio grew by 13.2% y-o-y and 4.7% q-o-q. Free float: Š Net interest margin (NIM) improved to 3.84%, up 17 bps q-o-q. 690.4 cr (No of shares) Key negatives Š Slower traction in fee income for Q4FY2021, growing by 6.0% y-o-y to Rs. 3,815 crore, slower than advances growth. Shareholding (%) Our Call Promoters 0.0 Valuation - We expect RoEs to normalise in FY2022E, aided by normalised credit cost and FII 47.8 business traction. Using the SOTP methodology, we value the bank’s standalone operations at ~2.5x its FY2023E BV and rest of the subsidiaries at ~Rs. 123 per share. The bank is available at DII 38.9 2.4x/2.1x its FY2022E/FY2023E BVPS. The stock has corrected by ~16% from its highs, and we believe the valuations are attractive, considering the overall franchise value as a whole, strong Others 13.3 capitalisation, and a high provision coverage ratio (PCR) being key comfort factors. Healthy capital levels (CET-1 at 16.8%) and provision buffers indicate balance sheet strength. We have increased our earnings forecast for FY2022E and FY2023E, factoring in better growth and Price chart lower credit risk burden and find the improving granularity of the book provides better earnings visibility for ICICI Bank. Hence, we expect the stock to have further re-rating potential. We 700.00 maintain Buy rating on the stock with a revised SOTP-based price target (PT) of Rs. 800. 600.00 Key risk 500.00 A slower recovery in the economy, higher slippages due to COVID-19 vulnerabilities, and 400.00 slippages from the corporate book (especially from the ‘BB and below’-rated portfolio) could 300.00 impact earnings. 200.00 Valuation Rs cr 20 20 20 21 - - - - Particulars FY19 FY20 FY21E FY22E FY23E Apr Apr Dec Aug Net Interest Income (NII) 27,014.8 33,267.1 38,990.0 39,755.4 47,141.4 Price performance Net profit (Rs cr) 3,364.4 7,931.3 16,190.0 19,651.0 24,349.2 EPS (Rs) 5.2 12.3 24.2 29.4 36.4 (%) 1m 3m 6m 12m P/E (x) 109.8 46.8 23.7 19.5 15.7 Absolute 1.0 6.0 39.7 64.2 BVPS (Rs) 162.5 174.3 213.2 238.8 270.7 Relative to P/BV (x) 3.5 3.3 2.7 2.4 2.1 1.0 -1.2 7.6 8.0 Sensex RoE (%) 3.1 7.1 12.3 12.7 14.0 RoA (%) 0.4 0.8 1.3 1.3 1.4 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

April 23, 2021 1 Powered by the Sharekhan

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ICICI Bank Concall Highlights Š Outlook: Power demand, e-way bill generation, property registration, vehicle registrations, and GST collections continue to witness improvement. Š Strategy: Looking to do lending to the well-rated segment, which will be facilitated by lower costs, which can be achieved by keeping opex and credit cost low. Management’s focus remains on risk calibrated profits, leveraging synergies, and building partnerships. Š Credit Cost: Management continues to hold good COVID-19 provision. The bank believes that 1-2 quarters are needed to better assess the credit cost. The retail portfolio has grown significantly and may see some slippages as the portfolio seasons. Rating mix of the advances mix has changed for the bank, with better- rated book higher proportion for the bank. Š BB and below book: BB and below book have seen decent amount of upgrades. The sector not shown in BB i.e., power is either less than Rs. 600 crore size or has upgraded. Š Employee Count: Total employee count is 98,750 as of March 2021. Š Market share gains: In the non-mortgage business segment, the bank has worked hard to ensure credit delivery is seamless, as well as on improving the underwriting standards. Most of the things on the digital medium are pre-approved and the credit delivery is more smooth and faster and to good profile customers. The market share gain is on back of that aspect. Š Mortgage business: Faster credit delivery capability has helped in gaining clients. These are the reasons why the bank has been gaining market share. On the corporate front, disbursement done in the past one year, the restructured book is <1%, and hence the book has stood the Covid-19 test well. Š Collections trends: For most of the retail collection, April is too early to draw conclusions. However, the bank feels all lenders would have seen impact on collections, it is following the wait and watch policy.. Management has confidence on the underwriting process. Š The digital model helps in credit delivery, collections cost, and credit cost. Š Mortgage book has become the largest segment for the bank. GNPA of the housing subsidiary has been higher, mainly due to the nature of the book, which is on affordable finance and due to old builder finance book portion. Š Interest on interest waiver: The bank has excluded Rs. 175 crore from interest income as an estimated impact of interest-on-interest waiver. Income on IT refunds had a 4 bps impact during W4FY2021. The same was 11 bps in Q3FY2021. Š Pandemic Wave-2 impact: Management remains confident of underwriting done in portfolio. Management will need to see the impact of disruption caused by the current wave-2. Š Overseas book is now down to just 5% of loans. Of the total overseas exposure, around 70% exposure is to Indian companies for their overseas operations, etc. Around 16% exposure is India linked non-India exposure – which is a well-rated portfolio and around 6% exposure is towards NRIs. Overall, ~8% exposure is to non-India companies. Š Digital: The bank’s initiatives on the digital front and aggressive pricing (particularly in mortgages) have led to higher market share capture by the bank in retail segments. Š Slippages: Slippages included one account, which will get upgraded due to the resolution. Slippages in FY2021/Q4 stood at Rs. 16,100 crore/Rs. 5,500 crore (which is excluding pro forma slippages up to December 2020). In Q4FY2021, retail slippages stood at Rs. 4,350 crore and SME/corporate slippages stood at Rs. 1,168 crore.

April 23, 2021 2 Powered by the Sharekhan

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Š Slippage guidance: With the surge in COVID-19 cases, management said it is difficult to guide on the retail slippages trend in the near term. Š Restructured book stood at Rs. 3,930 crore (0.5% of total loans), of which Rs. 2,010 crore is in the retail segment, while Rs. 1,910 crore is in the SME/corporate segment. Within the corporate portfolio, one LRD account and two commercial real estate accounts were restructured. Š Provisions: ICICI Bank holds provisions of Rs. 720 crore in its restructured book. Š BB and below book: In BB and below portfolio, only two accounts (Construction and Telecom) have exposure above Rs. 600 crores, while the rest are all smaller accounts. Around 13% of the builder portfolio was either rated BB and below or part of the NPA portfolio.

Results Rs cr Particulars Q4FY21 Q4FY20 YoY % Q3FY21 QoQ % Interest earned 19,842 19,189 3.4 19,730 0.6 Interest expense 9,411 10,262 -8.3 9,817 -4.1 Net interest income 10,431 8,927 16.9 9,912 5.2 Non-interest income 4,111 4,255 -3.4 4,686 -12.3 Net total income 14,542 13,182 10.3 14,599 -0.4 Operating expenses 6,003 5,792 3.6 5,779 3.9 Pre-provisioning profit 8,540 7,390 15.6 8,820 -3.2 Provisions 2,883 5,967 -51.7 2,742 5.2 Profit before tax 5,656 1,423 297.6 6,078 -6.9 Tax 1,254 201 522.9 1,138 10.1 Profit after tax 4,403 1,221 260.5 4,940 -10.9 Gross NPA (%) 5.33 6.04 -71 bps 4.72 61 bps Net NPA (%) 1.24 1.54 -30 bps 0.69 55 bps Source: Company; Sharekhan Research

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Outlook and Valuation n Sector View – Credit growth yet to pick up, private banks placed better System-level credit offtake, which is still subdued, is now improving, with credit growth of over 6% in the latest fortnight. On the other hand, deposits rose by ~12%, which indicate a healthier economic scenario. Moreover, the accommodative stance of the Reserve Bank of India (RBI), resulting in surplus liquidity, provides succour in terms of easy availability of funds and lower cost of funds for banks and financials. The end of the loan moratorium is a relief. Going forward, CE is likely to be a function of book quality, client profile, as well as economic pickup. At present, we believe the banking sector is likely to see increased risk-off behaviour, with tactical market share gains for well-placed players. We believe private banks, with improved capitalisation and strong asset quality (with high coverage and provisions buffers), are structurally better placed to take-off once the situation normalises. n Company Outlook – Strong franchise, good for the long term ICICI Bank’s strong brand positioning across retail, business banking, and corporate with a pan-India presence makes it an attractive and strong business. Looking ahead, we believe optimism in the economy supported by indicators of resumption of economic activity and continued growth in digitisation along with the bank’s extensive franchise, high-quality digital platforms and solutions, and its prudent risk management practices with strong capital ratios put us it in a good position to capture opportunities that will arise in the near and medium term. Stabilising watchlist book, healthy provision buffer, and margin improvement and liability profile indicate a strong business outlook for the bank. Moreover, improving collections efficiency and recovery in business traction indicate that the scenario is normalising fast. With a strategy of front-loading of provisions, exposure to better-rated borrowers, and a decline in watchlist indicate that the bank enters FY2022 with a strong book quality and minimal legacy burden. We find ICICI Bank to be an attractive franchise with a strong balance sheet and pan-India reach, which make it attractive for the long term. Moreover, its well-performing subsidiaries, which are strong players in their respective fields, add value to the overall business. n Valuation – Maintain Buy rating with revised PT of Rs 800 We expect RoEs to normalise in FY2022E, aided by normalised credit cost and business traction. Using the SOTP methodology, we value the bank’s standalone operations at ~2.5x its FY2023E BV and rest of the subsidiaries at ~Rs. 123 per share. The bank is available at 2.4x/2.1x its FY2022E/FY2023E BVPS. The stock has corrected by ~16% from its highs. We believe valuations are attractive, considering the overall franchise value as a whole, strong capitalisation, and a high PCR being key comfort factors. Healthy capital levels (CET-1 at 16.8%) and provision buffers indicate balance sheet strength. We have increased our earnings forecast for FY2022E and FY2023E, factoring in better growth and lower credit risk burden and find the improving granularity of the book provides better earnings visibility for ICICI Bank. Hence, we expect the stock to have a further re-rating potential. We maintain a Buy rating on the stock with a revised SOTP-based PT of Rs. 800.

Valuation ICICI Bank SOTP valuation Rs Valuation Methodology Value of Standalone ICICI Bank 678 2.5x FY23E BVPS Non-Banking Subsidiary Valuation ICICI Bank Holding Value/share Life Insurnace Subsidiary 73.5% 62 2.5x EV FY23E; 20% Holdco discount General Insurance Subsidiary 51.9% 41 38.4x FY23E PAT; Holdco discount 20% Broking business 75.0% 12 Proportionate Mcap Rest 7 Holding Co discount 20.0% SOTP Valuation (Rs. per share) 800

Source: Company; Sharekhan Research

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One-year forward P/BV (x) band

3.5

3.0

2.5

2.0

1.5

1.0

0.5 20 19 18 21 20 20 19 19 18 18 21 20 19 ------Jul Jul Jul Jan Jan Jan Oct Oct Oct Apr Apr Apr Apr

PBV 3-yr Avg +1 sd -1 sd

Source: Sharekhan Research

Peer Comparison CMP P/BV(x) P/E(x) RoA (%) RoE (%) Particulars Rs/Share FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E ICICI Bank 570 2.4 2.1 19.4 15.6 1.3 1.4 12.7 14.0 HDFC Bank 1414 3.4 3.0 19.9 17.8 2.0 1.9 18.2 17.8 Axis Bank 671 1.9 1.7 20.2 18.9 0.8 0.7 9.5 9.4 Source: Company, Sharekhan research

April 23, 2021 5 Powered by the Sharekhan

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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. The bank is the second largest private sector bank in terms of loan book size, having a pan-India presence. The bank’s subsidiaries in life insurance, general insurance, and stock broking 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 60+%, while an increasingly high proportion of corporate loans disbursed are to customers rated A- and above, which helps de-risking the overall loan book.

Investment theme The bank has built an attractive franchise consisting of banking, insurance, and securities business over the years. We believe going forward, growth and asset quality risks have declined and outlook has improved due to the green-shoots of recovery. The bank has continued to improve its portfolio mix towards retail (granular) and higher rated corporate loans; hence, in the past four years, this has helped it significantly de-risk its balance sheet from legacy stress and has enhanced franchise value. We find ICICI Bank to be an attractive franchise with a strong balance sheet and pan-India reach, which will help it tide over medium-term challenges. Moreover, its well-performing subsidiaries add value to the overall franchise which is another positive.

Key Risks A slower recovery in the economy, higher slippages due to COVID-19 vulnerabilities, and slippages from the corporate book (especially from the ‘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 8.23 2 SBI MUTUAL FUND 4.48 3 ICICI PRUDENTIAL MUTUAL FUND 3.38 4 Dodge & Cox 3.25 5 HDFC MUTUAL FUND 2.98 6 GOVERNMENT OF SINGAPORE 2.67 7 KOTAK MAHINDRA MUTUAL FUND 1.96 8 NIPPON INDIA MUTUAL FUND 1.91 9 ADITYA BIRLA SUN LIFE MUTUAL Fund 1.76 10 UTI MUTUAL FUND 1.6 Source: Bloomberg

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April 23, 2021 6 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services

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