May 25, 2021 ICICI Bank Limited: Ratings reaffirmed Summary of rating action Instrument* Previous Rated Current Rated Rating Action Amount Amount (Rs. crore) (Rs. crore) Basel III Compliant Tier II Bonds 10,000.00 10,000.00 [ICRA]AAA(hyb)(Stable); reaffirmed Basel III Compliant Additional Tier I Bonds 13,500.00 13,500.00 [ICRA]AA+(hyb)(Stable); reaffirmed Lower Tier II Bonds Programme 5,279.00 5,279.00 [ICRA]AAA(Stable); reaffirmed Lower Tier II Bonds Programme 2,126.00 - [ICRA]AAA(Stable); reaffirmed and withdrawn Unsecured Redeemable Long-term Bonds 33,900.00 33,900.00 [ICRA]AAA(Stable); reaffirmed Programme (Infrastructure Bonds Programme) Long-term Bonds Programme# 488.91 488.91 [ICRA]AAA(Stable); reaffirmed Long-term Bonds Programme# 36.61 - [ICRA]AAA(Stable); reaffirmed and withdrawn Fixed Deposit Programme - - MAAA(Stable); reaffirmed Certificates of Deposit 50,000.00 50,000 [ICRA]A1+; reaffirmed Total 1,15,330.552 1,13,167.91 *Instrument details are provided in Annexure-1 # From erstwhile ICICI Limited; amount outstanding, as on November 30, 2016, including accrued interest on zero coupon bonds Rationale IBL’s ratings are supported by its strong market position across verticals in the financial services sector, which in turn has driven growth of its granular assets and liabilities. IBL is one of the three systemically important banks in India, with its share in banking sector advances rising to 7.04% as on December 31, 2020 from 6.8% as on December 31, 2019 and 6.5% as on December 31, 2018. The ratings continue to factor in the strong capitalisation profile (CET I capital: 16.80% as on March 31, 2021) as well as the bank’s strong ability to raise capital. This strong capital position is expected to provide a cushion against any future asset quality stress and is also likely to support future asset growth. Further, the bank continues to derive significant value from its subsidiaries, and the residual stake in its subsidiaries is meaningfully large in relation to the core capital. Furthermore, IBL’s resource profile remains strong (CASA of 46.3% as on March 31, 2021) driven by retail franchise and well-supported by a wide branch presence and digital platforms leading to one of the lowest cost of funds in the private sector. Fresh NPA generation remained at elevated levels in FY2021, mainly because of the impact of Covid-19, especially in the retail segment. While interventions, including restructuring and lending under ECLGS, are likely to have contained the quantum of slippages, incremental asset risk in the wake of disruptions caused due to the second Covid-19 wave remains monitorable. IBL has made sizeable floating provisions over Q4 FY2020-FY2021, equivalent to ~1% of the standard advances and is expected to partially offset these risks. Moreover, the bank’s strong operating profitability, coupled with a reasonably high provision coverage ratio, is collectively expected to minimise the impact of the second wave on the profitability of the bank. ICRA expects the bank to comfortably absorb asset quality shocks while maintaining high capital cushion in relation to the rating category. The solvency indicator (net NPA/core equity) is also expected to remain better than the negative rating triggers driving a stable outlook on the ratings. ICRA has withdrawn the rating assigned to the Rs. 2,126-crore Lower Tier II Bonds and Rs.36.61 crore Long-term Bonds programme as these bonds are fully redeemed, and no amount is outstanding against the rated instruments. The rating was withdrawn in accordance with ICRA’s policy on withdrawal and suspension (click here for the Policy). www.icra .in Page | 1 Key rating drivers and their description Credit strengths Strong market position across financial services verticals supports granular growth of assets and liabilities – IBL is one of the three systemically important banks in India with a 7.04% (6.79% as on December 31, 2019) market share in the banking sector advances and 19.2% (18.8% as on December 31, 2019) share in the private sector advances as on December 31, 2020. Along with its subsidiaries, IBL has a wide presence across various financial services verticals like life insurance, general insurance, securities broking, merchant banking, asset management, primary dealership, etc, with a leadership position in many of these businesses. This allows it to provide a diverse range of financial services to customers, thereby enhancing its customer engagement and retention strategy. Additionally, the current value of the bank’s holding in the listed entities of the group, namely ICICI Prudential Life insurance, ICICI Lombard General Insurance & ICICI Securities stood at ~Rs. 87,000 crore, which remains meaningfully large in relation to the overall core capital (~66-68% of CET-I) as on March 31, 2021. Over the last few years, IBL’s profitability was cushioned by stake dilution in these entities, during periods of elevated asset quality challenges. Supported by a strong retail franchise, IBL’s net domestic advances grew by 14% YoY as on March 31, 2021 to Rs.7.34 lakh crores. IBL continued to grow at a reasonably fast pace, despite headwinds due to Covid-19 with continued focus on the retail segment and higher rated corporates. During FY2021, its retail assets grew by 20% on a YoY basis while the corporate segment grew by 10%, offset by a 30% decline in overseas advances. With the incremental exposure being to retail assets and better- rated corporates, the growth in the risk-weighted assets (RWAs) was curtailed at 3.4% YoY as on March 31, 2021. With stronger growth in retail assets, the share of the retail book increased to 67% (63% as on March 31, 2020), while corporate advances accounted for 24% (25% as on March 31, 2020) and the SME accounted for 4% (3.5% as on March 31, 2020), respectively as on March 31, 2021. The share of overseas advances has been on a declining trend, accounting for 5% (8% as on March 31, 2020) of the net advances as on March 31, 2021. Superior liquidity and low cost of funds supported by strong liability franchise – Supported by its extensive branch presence and deepening of digital ecosystem, the bank’s deposit base continued to grow at a healthy pace, despite one of the lowest interest rate propositions on deposits. During FY2021, total deposits grew by 21% to Rs.9.33 lakh crore (as against 18% growth in FY2020). The bank’s CASA ratio stood at 46% as on March 31, 2021 (45% as on March 31, 2020), which remained higher than the private sector banks’ average of 42.5% as on December 31, 2020, although it was lower than the past levels (~50%) as the bank’s term deposit base continued to grow at a healthy pace on a large base. Further, the granularity of the deposit profile is reflected in the low share of top 20 depositors in total deposits, which stood at only 4.88% as on March 31, 2020 (5.74% as on March 31, 2019. The overall cost of interest-bearing funds for IBL remained low at 4.12% in FY2021 against the private sector average of 4.67% in 9M FY2021). The bank’s low cost and granular deposit base continue to remain key sources of advantage to IBL and are expected to continue to support the bank’s profitability, going forward. High capital cushions supported by improved internal capital generation as well as capital raise - IBL’s capitalisation ratios remained strong with CET I, Tier I and CRAR (as a percentage of RWA) at 16.80%, 18.06% and 19.12% as on March 31, 2021 (13.39%, 14.72%, and 16.11%, respectively, as on March 31, 2020). The capital ratios were strengthened during FY2021 on the back of improved internal capital generation with the RoA improving to 1.39% in FY2021 (0.77% in FY2020) and a capital raise of Rs. 15,000 crore. On a consolidated basis, IBL’s capitalisation remained comfortable with a Tier I ratio of 17.81% and CRAR of 18.87% as on March 31, 2021. With most of its subsidiaries remaining well capitalised and largely self-sufficient for their growth capital requirements, any capital infusion in the near to medium term in the subsidiaries is expected to remain limited, in relation to the bank’s overall profits. As per ICRA’s estimates, the bank’s current capital is sufficient to support its growth requirements over the medium term and absorb the expected asset quality shocks. This, while maintaining the capital cushion and solvency levels at better than the negative rating triggers. www.icra .in Page | 2 Improved profitability; sizeable Covid-19 provisions provide cushion against incremental asset quality impact – Net Interest Income (NII) grew by 17% to Rs. 38,989 crore in FY2021 against Rs. 33,267 crore in FY2020, supported by ~14% growth in net advances and an expansion in interest spreads. Improvement in the spreads was driven by an increasing share of retail advances and a declining share of overseas advances, while strong accretion of low cost deposit and capital raising drove borrowing levels down, resulting in lower cost of funds. This helped offset the impact of comparatively higher slippages during FY2021. The bank’s non-interest income, which primarily comprises fee income (with high share of retail fee at 77%), was lower at 1.20% of ATA in FY2021 (1.44% in FY2020) due to the impact of Covid-19 on economic activity, though it remained better than the private sector average of ~1.14% for 9M FY2021. With the decline in operating expenses because of Covid- 19, and relatively lower operating expenses, the operating profitability of the bank remained strong and improved to 2.70% of ATA in FY2021 against 2.57% in FY2020.