Equity Research Report: ICICI Bank

ICICI Bank may scale 1154 by Mar’23 and 1385 by Mar’24 amid steady business growths, lower NPA provisions/credit costs, and higher NIM

ICICI Bank is the 2^nd largest of the old-generation private banks in India, originally promoted in 1994 by ICICI Limited (Industrial Credit and Investment Corporation of India), an Indian FI (Financial Institution), and a wholly-owned subsidiary. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India (GOI), and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. Until the late 1980s, ICICI primarily focused its activities on project finance, providing long-term funds to a variety of industrial projects.

Headquartered in Mumbai, ICICI Bank now offers a wide range of banking products and financial services for corporate and retail customers through a variety of delivery channels and specialized subsidiaries in the areas of investment banking, life, non-life insurance, venture capital, and asset management. ICICI Bank has a presence in 17 countries. The bank has subsidiaries in the U.K. and Canada; branches in the U.S., Singapore, Bahrain, Hong Kong, Qatar, Oman, Dubai International Finance Centre, China, and South Africa; as well as representative offices in UAE, Bangladesh, Malaysia, and Indonesia. The company's UK subsidiary has also established branches in Belgium and Germany. Overall, almost 75% of ICICI Bank’s consolidated revenue comes from banking/lending/treasury, 18% from insurance/AMC/securities, and 7% from other activities, while 98% of consolidated revenue comes from India.

Key management: ICICI Bank

Board Members: ICICI Bank

Key Shareholders: ICICI Bank: Mainly Indian DIIs

Summary of latest report card: Q2FY23 (Consolidated: INR 100 Cr. =1B)

·         NII Rs.168.54B vs 150.70B sequentially (+11.84%) and 133.85B yearly (+25.91%)

·         Other operating income (including banking/insurance/cross-sell fees and bond portfolio MTM/HTM) Rs.163.28B vs 130.60B sequentially (+25.02%) and 160.07B yearly (+2.01%)

·         Total operating income Rs.331.81B vs 281.29B sequentially (+17.96%) and 293.92B yearly (+12.89%)

·         Total operating expenses Rs.203.27B vs 166.50B sequentially (+22.08%) and 56.63B yearly (+12.84%)

·         EBTDA (Core operating profit) Rs.128.54B vs 114.79B sequentially (+11.98%) and 113.77B yearly (+12.98%)

·         NPA/SR provisions Rs.165.30B vs 113.08B (+46.18%) sequentially and Rs.277.42B yearly (-40.42%)

·         EBITDA (Notional profit after NPA provision) Rs.112.01B vs 103.48B sequentially (+8.24%) and 86.03B yearly (+30.20%)

·         EBTDA/Share (Core operating EPS) Rs.46.11 vs 41.25 sequentially (+11.80%) and 41.01 yearly (+12.44%)

·         EBITDA margin 33.76% vs 36.79% sequentially (-3.03%) and 29.27% yearly (+4.49%)

·         EBTDA margin 38.74% vs 40.61% sequentially (-2.07%) and 38.71% yearly (+0.03%)

·         Operating cost/Income ratio 61.26% vs 59.19% sequentially (+2.07%) and 61.29% yearly (-0.03%)

·         Reported NIM 4.16% vs 4.01% sequentially (+0.15%) and 4.00% yearly (+0.16%)

·         Standalone Gross advance Rs.9.39T vs 8.96T sequentially (+4.79%) and 7.65T yearly (+22.70%)

·         Standalone gross deposit Rs.10.91T vs 10.50T sequentially (+3.78%) and 9.77T yearly (+11.52%)

·         Standalone GNPA Rs.325.71B vs 331.63B sequentially (-1.79%) and 414.37B yearly (-21.40%)

·         Standalone GNPA/Gross advance ratio 3.47% vs 3.70% sequentially (-0.23%) and 5.42% yearly (-1.95%)

·         Retail loans are around 44.2% of the total loan portfolio (including non-fund-based O/S)

·         Around 70% of the loan is with floating interest rate and 20% are unsecured personal loans, most of which is from salaried employees from well-rated corporates, MNCs, and government entities (very low probability of consistent default)

·         Growing digital thrust

·         Strong capital/balance sheet position

·         Robust performance from most of the key subsidiaries and associates

·         The extensive branch network of 5614 branches across India (urban, metro, semi-urban and rural)

Highlights of analyst concall: Q2FY23

·         Indian economic recovery has been robust despite global macro headwinds amid lingering geopolitical tensions, higher inflation, and higher borrowing costs

·         Indian monetary (RBI) and fiscal authority (government) have been taking various steps to address the evolving situation

·         ICICI Bank is committed to growing the core operating profit in a risk-calibrated manner through a 360-degree customer-centric approach and enhancing strong deposit franchise

·         LCR (Liquidity Coverage Ratio) at 127%  

·         Aiming to grow the loan book in a granular manner with a focus on risk & reward

·         Leveraging digital tech across business/verticals

·         The declining trend of NPA and adequate provision; over PCR at 80.6%

·         Strong balance sheet and capital base; thrust on ROE

·         Robust loan growth across various segments led by a mortgage (+20.4% y/y and 4.4% q/q); auto (19.0%/5.2%) and personal loan (48.8%/11.5%), while CV/Commercial equipment relatively muted (5.6%/0.6%)

·         Overseas loan portfolio declined by -19.4% sequentially and -10.4% yearly primarily for maturities of short-term India-linked trade book

·         Net NPA additions (fresh slippage-recovery) were around Rs.6.05B vs 3.82B sequentially

·         Sequentially higher NIM is due to the time lag between repricing of loan yields and deposit pricing; i.e. banks are increasing lending rate first with a bigger percentage and then increasing the deposit rate after some months with a relatively smaller percentage; this trend will continue amid RBI tightening

·         Fees income grew by +17.6% yearly

·         Higher dividend income from subsidiaries and associates supported by higher final payout/dividend from ICICI General, ICICI Bank UK, partly offset by lower dividend from ICICI AMC and Securities

·         Operating cost increased by +24.2% (y/y) primarily due to higher employee costs, retail business, and tech-related costs

·         Deposit growth gaining traction from Q1 amid higher FD rate

·         The bank is not too much concerned about the high growth rate in retail lending despite global macro headwinds as consumer sentiment is high amid rising income and pent-up demand, but the bank is also cautiously optimistic and didn’t dilute lending parameters

·         Additional broad-based contingent NPA provision is prudential amid adverse global macros and its possible spillover in India, whereby there may be some fresh slippages; it’s not related to ‘manage’ ROA

·         Bank reset EBLR or repo-linked loan rates every 3 months, while adjustments of deposit rates take place with a lag as per evolving situations and is an ongoing process

·         Some borrowers may shift to other banks/lenders if they find lower borrowing costs and thus bank has to reprice all loans at a competitive rate carefully, but have adequate pricing power

·         The bank is providing adequate contingent provision because of various macro headwinds globally and its possible spillover effect in India, but overall NPL is not significant, while recoveries from COVID-stressed assets are high; thus overall credit costs may be lower than normal in the coming days

·         Bank has added around 200 branches in the last 6-months against 340 branches last year; the pace of branch expansion has been increased in a calibrated way to serve growing real estate and commercial/business clients (expansion of local footprint); the bank will continue to expand branches in coming two quarters as overall revenue flow is quite upbeat

·         No big concern about the SME portfolio

·         Higher interest rate is generally positive for a bank’s NIM

·         So far no visible signs of stress among borrowers despite higher borrowing costs

·         The bank is not expecting any big jump in NPL/NPA because of higher borrowing costs but remains cautious

·         Overall retail spending is pretty strong while coming moderation in corporate spending/capex

·         Revolving loans and EMIs are also quite stable

·         NIM may not see any big jump in the coming days as the bank has to reprice deposit rates

·         As an average retail salary increment to the tune of +10%, it may help in servicing additional borrowing costs (despite higher inflation of around +6%?)

Fair Valuation: ICICI Bank: Rs.1154-1385-1661-1994 for FY: 23-24-25-26

ICICI Bank reported a core operating EPS (without NPA/other provisions) of around Rs. 64.10 in FY22 against 63.03 in FY21; i.e. a muted growth of +1.69% as the bank focused more on pandemic NPA management rather than business/credit growths for most of the year after COVID disruptions; it has an average growth rate around 18% in pre-COVID times. Now considering an average sequential run rate of around +5%; i.e. annualized +20%, ICICI Bank should report around +20% growth/CAGR in core operating EPS in FY:23-26 amid normalization/full reopening of the economy, huge infra and targeted fiscal stimulus, upbeat Indian economy and elevated bond yield curve (positive for banks & financials due to the model of business/lending).

Also, the current run rate for advance growths in ICICI Bank is around +20% annualized and the trend should continue in the coming quarters. Overall, ICICI bank may report around +25% CAGR in core operating EPS in FY: 23-26, but considering synchronized global stagflation/slowing economic growths and possible spillover effect of that in India, more RBI tightening, higher borrowing costs, higher inflation/lower discretionary spending and possible higher NPA, 20% CAGR of core operating EPS may be appropriate (on the conservative side) rather than 25%. ICICI Bank is cautiously optimistic about overall business growth amid global/local economic slowdown, higher inflation/macro headwinds, higher borrowing costs, and lower discretionary spending.

But like all other big private banks, ICICI Bank is also very selective in providing loans to borrowers having excellent credit ratings and cash flow. Despite adverse global macros, India may be a bright spot in a turbulent ocean as almost 30% of Indian households have good and stable/increasing income-being governments or reputed/trusted corporate/private employees. In India, most of the public and private sector employees have real income growth (salary increase above the inflation rate). This coupled with a huge flow of black money, mainly generated from various fiscal stimulus/capex and grants from the government and other illegal ways may be the backbone of India’s consumption story (discretionary spending).

Also, India’s external vulnerabilities are not significant, if we consider robust service export, remittances and FDI flows. India’s corporate sector is now largely deleveraged after years of rigorous NPA management by banks. Thus, India is looking rock solid even in global turbulence and there is very little possibility of an all-out or even mild/brief recession in the coming years. Also, the government is increasing fiscal stimulus (capex and grants) in a targeted way ahead of the G20 meeting (2023) and the early 2024 general election.

Thus assuming consolidated core operating EPS around Rs.76.92-92.30-110.76 and an average core operating PE of 15, the fair valuation of ICICI Bank may be around Rs.1154-1385-1661-1994 between FY23-26. As the stock/financial market generally discounts at least 1-year projected earnings in advance, ICICI Bank may scale 1154 by Mar’23, 1385 by Mar’24, 1661 by Mar’25, and 1994 by Mar’26, considering all the pros & cons (as discussed above), conservative, but the prudent and realistic approach of the management coupled with robust recovery mechanism (ensuring lower credit costs).

Overall, for ICICI Bank, there are huge improvements in asset quality, balance sheet, and the thrust on digital banking. And along with a credible professional management post-Kochhar/Videocon loan/corruption saga- angel investors/FPIs are again showing considerable interest in ICICI Bank as a quality and trusted private bank in India, which also comes under RBI’s ‘too big to fall’ category; i.e. like HDFC Bank, Axis Bank, Yes Bank, SBI and many other private and PSU banks, Government will ensure stability in the Indian banking sector at any cost.

The above 80% loan provision ratio (PCR) is also providing comfort to the investors as it’s much above the RBI norm of 70% and PSBS levels of around 60%. Overall, ICICI bank’s loan portfolio now consists of around 54% retail, 23% corporate, 11% MSME, 9% rural/agri, and 4% overseas. ICICI Bank is now providing much more thrust on retail secured loans, especially mortgage, which is now almost 63% of the retail loan portfolio, followed by vehicle and equipment loans (14%), personal loans and credit cards (22%), and others (dealer funding loans and LAS) 1.5%.

Like all other big private banks, ICICI Bank also extends unsecured personal loans and credit cards mostly to well-paid salaried government and reputed corporate employees, who have salary accounts or some other banking connection with the bank with a good credit score. These private banks can easily attach those connected accounts of borrowers in case of any consistent default/NPA. Thus the overall risk of unsecured lending is also very small, but the return/yield is high, resulting in smaller credit costs for the bank. Although there is some competition now from various digital lending and BNPL (buy now, pay later) segments, borrowers’ experiences are not nice with these unsecured lending applications and their penalty charges are also abnormally high for any default. In a way, overall, ICICI Ban looks bright on personal banking thrust-‘Hum Hai Na’ along with prudent corporate lending-‘First is always special.

Technical view: ICICI Bank (LTP: 879 as of 23/12/2022-EOD)

Looking ahead, whatever may be the narrative, technically ICICI Bank has to sustain above 895 for 905/920-938/960*-990/1010-1025/1040, and 1060/1085 in the bull case scenario; on the flip side, sustaining below 880, ICICI Bank may further slip to 870/855-835*/805-790/760 and 640 in the bear case scenario.

Investors may enter around 855-835-800 levels.

ICICI Bank: Consolidated P/L Account: QLY

ICICI Bank: Consolidated P/L Account: YLY

ICICI Bank: Consolidated B/S

ICICI Bank: Consolidated Cash-flow:

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