Maintain BUY on ICICI Bank - Getting stronger - ICICI Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

ICICI Bank (Company Update): Getting stronger. Maintain BUY
(TP Rs 442, CMP Rs 343, MCap Rs 2,221bn)

ICICIBC has realised ~Rs 31bn in 1QFY21 so far, from stake sales in ICICIGI (Rs 22.5bn) & IPRU (Rs 8.4bn) while retaining majority stakes. The move bolsters the bank's already strong capital base (16.1%, +40bps) and allows it to make further COVID-19 related provisions, while limiting the RoAE impact. This demonstrates its ability to augment its capital base, without raising funds (media articles suggest that it is looking to raise $ 3bn). Even without said (potential) fund raise, the bank is well positioned to withstand COVID-19 related stress and capture any resurgent growth. ICICIBC remains our top pick amongst large private banks. Maintain BUY with a SoTP of Rs 442.

Strategic sense for stake sale: The exact rationale for a stake sale (including the size and timing) can always be debated upon, especially in the absence of regulatory requirements. Non-core businesses present attractive long-term propositions and could be potentially SoTP accretive. However, given (1) that ICICIBC continues to hold majority stakes in both subsidiaries, and (2) the proceeds can be used to organically augment the bank's (albeit already strong) capital base, we find the trade-off acceptable and prudent.

Stake sale gains to bolster the b/s: ICICIBC exited FY20 with (1) a strong B/S- CRAR of 16.1% w/w Tier 1 of 14.7%, (2) declining but moderate stress with GNPAs of 5.53% (-117bps YoY), (3) calc. coverage 75.6% (best in class) and (4) o/s std. assets provisions of Rs 55bn (13% of GNPAs) and (5) COVID-19 related provisions of Rs 21bn. Stake sale proceeds of ~Rs 31bn stand to boost CRAR by 40bps. However, we believe that the bank is better off offsetting the gains by making additional (prudent) provisions of Rs 28bn (i.e. 42bps of average loans).

Potential fund raise? We believe that the bank is already well capitalised, has sufficiently provided for existing stress and can comfortably provide for potential COVID-19 related stress without needing capital. Nevertheless, such a fund raise, while book accretive (ABVs rise ~9%), would dilute RoAEs (-100bps) and increase CRAR by ~250bps. We have not factored it into our estimates.

Funding and liquidity not a worry: The bank has been a beneficiary of polarisation in this space, as its deposits grew 18/8% in 4QFY20. CASA (45.1%) and deposit granularity (share of deposits from retail and small business customers at 57% on a Basel III basis) point to a lucrative deposit franchise. Not only does this help ICICIBC keep funding costs competitive, but it will also help the bank capture resurgent growth.

Shares of ICICI BANK LTD. was last trading in BSE at Rs.363.95 as compared to the previous close of Rs. 351.45. The total number of shares traded during the day was 2175826 in over 39889 trades.

The stock hit an intraday high of Rs. 365.75 and intraday low of 351.6. The net turnover during the day was Rs. 782084024.

Source : Equity Bulls

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