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Maintain BUY on ICICI Bank - Negative surprise on asset quality likely to be transient - HDfC Securities

Posted On: 2021-07-28 07:11:04 (Time Zone: UTC)

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

ICICI Bank's (ICICIBC) improving all-round performance over the past couple of years has been interrupted by the impact of the second wave in terms of asset quality during Q1FY22, a trend witnessed by all lenders. Slippages increased to 4.2% (FY21: 2.3%), driven primarily by higher retail slippages (6%). The bank, however, reported NII/PPOP/PAT in line with our expectations, by dipping into the COVID provisions (INR 10.5bn) during the quarter, to maintain PCR at 78%. Best-in-class liability franchise, risk-calibrated asset book and industry-leading technology initiatives for new-to-bank (NTB) business sourcing are likely to drive ICICI Bank towards above-industry growth and a 15% RoE trajectory. Maintain BUY with a revised SOTP price of INR 775 (earlier INR 770).

In-line operating performance: ICICI Bank delivered a strong operating performance with NII growth at 18% YoY, C/I ratio at 40.4% and credit costs at 1.7%. The bank reported strong loan growth of 17% YoY, driven by retail home loans (24% YoY) and business banking (53% YoY) while an increasingly granular deposit franchise (average CASA up 270bps YoY) drove best-in-class cost of funds (3.82%). During the quarter, the bank wrote back INR 10.5bn of COVID provisions, offset by an incremental INR 11.27bn of provisions towards a further conservative provisioning policy.

Retail slippages shoot up, provisioning remains adequate: ICICI Bank reported elevated gross slippages at 4%, driven by retail (6%, 94% of total slippages). The restructured portfolio increased to 0.7% of loans (Q4FY21: 0.5%), along with a marginal increase in BB & below pool to 1.9% (Q4FY21: 1.8%). The management attributed the bulk of the impairment to a dip in collection efficiency during April and May and expects the stress to normalise in H2 as economic activity resumes. With COVID surplus buffer at 0.9% of loans, along with PCR at 78%, we expect normalisation in slippages and credit costs (in the absence of a third wave).

Superior franchise poised for sustained rerating: ICICI Bank reported RoA/RoE of 1.5%/12.3% during Q1FY22, despite the quarter being marred by elevated slippages and lockdowns. The bank seems to be on track to achieve a 1.8% RoA by FY23 on the back of reflating NIMs (exercising of pricing power) and normalisation of credit costs (in the absence of any subsequent waves of pandemic). Maintain BUY with revised SOTP price of INR 775. The revision in target price is driven by revision in the value of listed subsidiaries.

Shares of ICICI BANK LTD. was last trading in BSE at Rs. 677.65 as compared to the previous close of Rs. 676.75. The total number of shares traded during the day was 213733 in over 5163 trades.

The stock hit an intraday high of Rs. 685.6 and intraday low of 673.3. The net turnover during the day was Rs. 145370341.

Source: Equity Bulls

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