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 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. 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 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 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 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 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: Net interest margin (NIM) improved to 3.84%, up 17 bps q-o-q. 690.4 cr (No of shares) Key negatives 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 3R Research Philosophy Update Stock ICICI Bank Concall Highlights Outlook: Power demand, e-way bill generation, property registration, vehicle registrations, and GST collections continue to witness improvement. 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. 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. 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. Employee Count: Total employee count is 98,750 as of March 2021. 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. 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. 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. The digital model helps in credit delivery, collections cost, and credit cost. 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. 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. 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. 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.