ICICI Bank Retail biz to drive growth

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

3R MATRIX + = - Summary

Right Sector (RS) ü Š ICICI Bank has seen a significant improvement in business and financial parameters and has steered well through the pandemic. Š The trend was visible in strong performance in Q1FY22 and guidance for lower Right Quality (RQ) ü gross NPA additions in Q2FY22 with a meaningful decline likely from H2FY22 onwards. Right Valuation (RV) ü Š Conservative provisioning (high PCR of 78.4% and COVID-19 related provision buffer of 0.9% of loans), a strong capital base (CAR of 19%) and overall franchise + Positive = Neutral - Negative value are positives, which will help the bank tide over medium-term challenges and support growth and valuations. What has changed in 3R MATRIX Š We maintain a Buy on ICICI Bank with a revised SOTP-based price target (PT) of Rs 876. It is emerging as growth leader with improving return ratios, making it our Old New preferred pick in the banking sector. RS  Š Strong operational performance in Q1FY22: Q1FY22 earnings increased by RQ  78% y-o-y and 5% q-o-q led by a 62% y-o-y decline in credit costs. Margins increased by 5 bps q-o-q to 3.89%. GNPA increased by 19 bps q-o-q to 5.15% RV  for Q1FY22.

Reco/View Change Š Ample liquidity led by strong capital base: The bank’s deposits rose 16% y-o-y in Q1FY22, led by a 25% y-o-y rise in CASA deposits that formed 46% Reco: Buy  of total deposits. Its liquidity coverage ratio is at 146%. It raised Rs. 15,000 CMP: Rs. 721 crore in equity capital in August 2020, which increased its CAR to 19% as at Q1FY22 from 16.3% at Q1FY21. We believe this has strengthened the bank’s Price Target: Rs. 876 á balance sheet and would help it withstand shocks. We expect ICICI Bank to á Upgrade Maintain â Downgrade emerge stronger and gain market share from state-owned banks/non-banking  finance companies that are facing multiple issues (such as higher GNPAs and Company details inadequate capital). Market cap: Rs. 499,737 cr Š Improving asset quality; robust outlook: ICICI Bank’s provision coverage ratio (PCR) was stable at 78.4% with the comfort of COVID-related provision 52-week high/low: Rs. 735/334 buffer (of 0.9% of loans). The management gross NPA additions to moderate NSE volume: in Q2FY22 and meaningfully decline from H2FY22 onwards. The extension of 53.3 lakh (No of shares) Mr. Sanjay Bakhshi as MD & CEO for two more years also gives us confidence that the bank can reclaim its decade-best RoE of 15-16% by FY2023/FY2024. BSE code: 532174 NSE code: ICICIBANK Our Call Valuation – Maintain Buy with a revised PT of Rs. 876: Using the SOTP Free float: 692.6 cr methodology, we value the bank’s standalone operations at ~2.6x its FY2023E (No of shares) BV and rest of the subsidiaries at Rs. 183 per share. The bank is available at 3.1x/2.7/2.3x its FY2022E/FY2023E/FY2024E BVPS. We believe that the Shareholding (%) valuations are attractive, considering the overall franchise value as a whole, Promoters 0 strong capitalisation and a high PCR that are key comfort factors. Healthy capital levels (CET-1 at 17.7%) and provision buffers indicate strength in the bank’s balance FII 48.0 sheet. In addition, the outlook for significant improvement on the asset quality DII 39.0 front makes it among the most preferred investment options in the banking sector. We maintain Buy rating on the stock with a revised SOTP-based price target (PT) Others 13.0 of Rs. 876.

Price chart Key Risks 800 A slower recovery in the economy, higher slippages due to COVID-19 vulnerabilities 700 and slippages from the corporate book (especially from the ‘BB and below’-rated 600 portfolio) could affect earnings. 500 Valuation Rs cr 400 Particulars FY21 FY22E FY23E FY24E 300 21 20 21 21 Net Interest Income (NII) 38,989.43 46,744.15 55,951.11 65,862.05 - - - - Jan Sep Sep

May Net profit (Rs cr) 16,193 21,438 27,560 31,531 EPS (Rs) 23.4 31.0 39.8 45.6 Price performance P/E (x) 30.8 23.3 18.1 15.8 (%) 1m 3m 6m 12m BVPS (Rs) 208.7 235.0 267.5 308.3 Absolute 8.0 11.3 18.2 49.1 P/BV (x) 3.5 3.1 2.7 2.3 Relative to -3.0 0.2 8.6 40.2 RoE (%) 12.57% 13.97% 15.86% 15.83% Sensex RoA (%) 1.39% 1.61% 1.77% 1.73% Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

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Well-positioned to gain market share: Private banks are increasing their market share due to slower business growth in public sector banks emanating from the ongoing consolidation process, higher GNPAs and a low capital base. Private banks’ share of system loans increased to 38% in FY20 from 19% in FY09. They accounted for 33% of total deposits in FY20, up from 21% in FY09. We believe that ICICI Bank will accelerate its market share gains in the next few years, driven by faster business (loans + deposits) growth (15-20%) as compared to public-sector banks (10-12%) and a stronger capital base. ICICI Bank’s share of system loans doubled to 6% in FY20 from 3% in FY09. Its share of deposits rose to 5% from 3.1%. We forecast ICICI Bank’s loan market share to increase to 7% by FY22E and deposit share to rise to 5.8%. The latter should be led by a 24% annual growth in deposits over FY20-22E.

Leadership position in insurance, asset management and brokerage: ICICI Bank is the second-largest private bank in India. It has leadership position in other businesses as well through its subsidiaries. It has nine subsidiaries with ownership ranging from 51-100%, of which three are listed on the stock exchanges. ICICI Prudential Life is the third-largest life insurance company in India with 17.7% market share. Its annualised premium equivalent (APE) increased by 13% per annum over FY15 to FY20 to Rs. 30,900 crore whereas the value of new business (VNB) grew 5x over FY15-FY21 to Rs. 13,300 crore. ICICI Prudential AMC is India’s second-largest asset management company. Its AUM grew 1.8x over FY16-20 and it has a 13% share in India’s mutual fund industry. These subsidiaries accounted for 38% of the total’s group profit as of FY21.

CASA ratio second-highest among peers: ICICI Bank had one of the best CASA ratios (of above 49%) in the industry during FY16 to FY19, which helped the bank control its cost of funds. However, in FY21, the CASA ratio stood at 47% after falling to 45% in FY20. Despite this moderation, the bank’s CASA ratio is second only to Kotak Mahindra Bank. In FY21, ICICI Bank’s cost of deposits decreased by 88 bps y-o-y to 3.7% due to easy liquidity conditions.

GNPAs increased by 10 bps to 5.15% q-o-q aided by recoveries: GNPAs are down to 5.15% in Q1FY22 from 5.46% a year ago, but up 10 bps q-o-q. This is primarily due to an increase in fresh slippages by 31% q-o-q to Rs. 7,230 crore. Slippages were mainly from the retail portfolio that accounted for 94% of the total portfolio. However, higher recoveries and upgrades were instrumental in containing the growth in GNPAs.

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Financials in charts

Retail loan account for 60% of the book Overall loan book 0.1 0.0 0.0 0.1 0.0 804000 0.1 15.0% 0.1 0.0 0.0 0.2 0.1 0.1 0.1 0.2 704000 0.1 13.0% 0.3 0.3 0.3 0.2 604000 0.3 0.1 0.3 504000 0.1 11.0% 404000 304000 9.0% 0.6 0.6 0.6 0.5 0.6 204000 0.1 0.5 7.0% 104000 4000 5.0% FY16 FY17 FY18 FY19 FY20 FY21 FY16 FY17 FY18 FY19 FY20 FY21 Retail loans Domestic Corporate Overseas business SME Loan (Rs cr) Growth YoY (%) Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Trend in CASA GNPA & NNPA have reduced

52% 50.4% 12.0% 85% 49.6% 50% 49.3% 10.0% 75% 47.6% 8.0% 48% 65% 45.8% 6.0% 46% 45.1% 55% 4.0% 44% 2.0% 45% 42% 0.0% 35%

40% 15 16 17 FY14 FY FY FY FY18 FY19 FY20 FY21 FY16 FY17 FY18 FY19 FY20 FY21 CASA ratio (%) Gross NPLs (%) Net NPLs (%) Coverage (RHS) (%) Source: Company, Sharekhan Research Source: Company, Sharekhan Research

RoE and ROA trend (%) Well-capitalised with CAR of 19%

2.0% 18% 20 0.1 1.8% 1.1 15% 2.5 0.1 3.0 1.8 1.6% 0.1 15 3.6 1.4 0.1 12% 1.4% 1.2% 0.1 0.1 9% 10 18.1 1.0% 6% 14.4 15.9 15.1 14.7 0.0 13.1 0.8% 5 3% 0.6% 0.0 0.0 0.0 0.0 0.0 0.0 0.4% 0% 0

15 19 20 FY16 FY17 FY18 FY19 FY20 FY21 FY FY16 FY17 FY18 FY FY FY21 ROA (LHS) ROE (RHS) Tier I (%) Tier II (%) Source: Company, Sharekhan Research 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 remains sedate, growing by 6.5% y-o-y in the fortnight ending August 13, 2021. On the other hand, deposits rose by 10.6%, which indicate a healthier economic scenario. Moreover, the RBI’s accommodative monetary policy stance, 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, corporate exposure is likely to be a function of asset quality, client profile, as well as economic recovery. At present, we believe that banking sector is likely to see increased risk-off behaviour, with tactical market share gains for well-placed players. We believe private banks, with a strong capital base and strong asset quality (with high coverage and provision buffers), are structurally better placed to take-off once the situation normalises. n Company outlook - retail business to be driving force ICICI Bank’s strong brand positioning across retail, business banking and corporate banking segments with a pan-India presence makes it an attractive and strong business. Looking ahead, we believe that optimism in the economy, supported by resumption of economic activity and continued growth in digitisation and the bank’s extensive franchise, high-quality digital platforms, prudent risk management practices and strong capital ratios make the bank well-placed to capture opportunities that will arise in the near to medium term. A stabilising watchlist book, healthy provision buffer and improvement in margins and liability profile indicate a strong business outlook for the bank. In addition, improving collection efficiency and a recovery in business traction indicate that the scenario is normalising fast. With front-loading of provisions, exposure to better- rated borrowers, decline in watchlist indicate that the bank is entering 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 over 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 with a revised PT of Rs. 876 Using the SOTP methodology, we value the bank’s standalone operations at ~2.6x its FY2023E BV and rest of the subsidiaries at Rs. 183 per share. The bank trades at 3.1x/2.7/2.3x its FY2022E/FY2023E/FY2024E BVPS. We believe that the valuations are attractive, considering the overall franchise value as a whole, strong capitalisation and a high PCR that are key comfort factors. Healthy capital levels (CET-1 at 17.7%) and provision buffers indicate the balance sheet’s strength. In addition, the outlook for significant improvement on the asset quality front also makes it among the most preferred investment option in the banking sector. We maintain Buy rating on the stock with a revised SOTP-based price target (PT) of Rs. 876.

SoTP valuation Particulars Holding (%) Valuation Methodology Value per Share ICICI Bank - Parent 100% 2.6x FY23E P/ABV 693 ICICI Prudential Life 53% Embedded Value 69 ICICI Lombard 56% Based forward P/B of 7x 57 ICICI Prudential MF 51% 7% of AUM 20 ICICI Bank UK 100% 0.6x Book Value 2 ICICI Bank Canada 100% 0.6x Book Value 3 ICICI HF 100% 1.0x Book Value 3 ICICI Securities 79% 22x FY21E EPS 24 ICICI Ventures 100% 10% of AUM 3 ICICI Sec. PD 100% 1.5x Book Value 3 Total (INR) 876 Source: Company, Sharekhan Research

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About company ICICI Bank is the India’s second-largest private bank and has a leadership position in other financial services businesses through its subsidiaries. The bank offers the entire spectrum of financial services to customer segments covering large and mid-corporates, MSME, Agriculture and retail businesses.

Investment theme ICICI Bank has a well- diversified loan book having strengths in both retail and corporate segments. The bank’s liability profile has improved significantly, which would be helpful in sustaining margins at healthy levels. Of late, loan book quality is improving, which we believe is positive for its profitability and growth going forward. However, we believe given the comfortable liquidity, the overall franchise value, healthy capitalization levels and a high provision coverage ratio (PCR), the bank will be able to ride over medium-term challenges.

Key Risks Prolonged uncertainty due to intermittent lockdowns may affect growth, and rise in NPAs in unsecured and other retail segments can pose a risk to profitability.

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

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Life Insurance 7.59 2 SBI Mutual Fund 4.68 3 ICICI Prudential 3.4 4 HDFC Mutual Fund 2.74 5 Kotak Mutual Fund 1.97 6 Nippon AMC 1.74 7 Dodge & Cox 3.25 8 Govt of Singapore 2.98 9 Euro pacific growth fund 1.45 10 UTI Mutual Fund 1.60 Source: BSE

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

September 06, 2021 6 Stock Update Negative Neutral Positive Right Quality Negative Neutral Positive Right Sector Understanding theSharekhan3RMatrix Source: SharekhanResearch Negative Neutral Positive Right Valuation nuty rwh, nraig netet, ihr nr brir ad favorable and barrier, entry higher investments, increasing growth), consistent industry scenario, demand-supply (favorable fundamentals industry Strong n bek lbl ar evrnet t wratn fr oe ta historical than lower for warranting etc environment macro global bleak and policies government adverse issue, governance corporate of as Emergence such roadblocks weak; are outlook earnings but valuations premium at Trading valuation multiples. in expansion of scope limited having and valuations historical to par Tradingat and peers its Industry up-cyclewithconducivebusinessenvironment. amongst outperformance expected to due multiple valuation in are trading at discount to valuations industry leaders/historical but average multiples, Expansion ratios return improving and expectation growth earnings Strong balance sheet detoriating and pressure margin in resulting environment realisation prices/weak of key reshuffling management personal, questionable corporate factors, governance, high commodity external/internal by led by led trend growth Weakening raw term, near in triggers/events positive material pricemovementturningunfavourable of lack shutdown, factory as such events specific Company uncertainty, term near in resulting calamities as natural such events Untoward profile, growth term near affecting slowdown Macro Good corporategovernance. and portfolio product/service differentiated track-record, flows, sheet/cash financial Balance Healthy Strong bandwidth, management Strong leader, Sector institutions) and any significant increase in commodity prices adverse affecting profitability. environment, industrial global by implemented policies unfavorable and economic headwinds (currency stable the in challenges global and fundamentals business the affecting policies low government from recover to Unable incremental investments byGovernment/privatecompanies lower and factors macro to due growth industry the in Stagnancy government policies valuation multiple. Know more about our products and services

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