ICICI Bank: Market Dominance and Government Support Should Lead Growth

During tough operating environment, ICICI bank saw healthy growth in core operating profit and its capital and liquidity position was strong. Franchise has been strengthened supporting robust flow of deposits. Improvement in asset quality parameters was also seen with granular and stronger portfolio mix. ICICI bank will continue to build on its long-term strategic focus of growing core operating profits in risk calibrated and granular manner. ICICI bank aims to further strengthen liabilities franchise. Leveraging of extensive network with wide geographical reach and comprehensive range of products and services should help bank achieve sustainable profit growth.

About ICICI Bank

ICICI Bank is a leading private sector bank in India. Consolidated total assets of ICICI bank were INR14.76 trillion at September 30, 2020. It currently has network of 5,288 branches and 15,158 ATMs across India. ICICI Bank offers range of banking products and financial services to corporate and retail customers. This is being done through variety of delivery channels and through ICICI Bank’s group companies.

Growth Enablers of ICICI Bank

• Strong Results Seen in FY22: Core operating profit grew 22.3% from INR313.51 billion in FY21 to INR383.47 billion in FY22 mainly because of an increase in net interest income by INR84.77 billion and fee income by INR30.28 billion. However, this growth was offset in part by higher operating expenses by INR51.72 billion. Provisions and contingencies (excluding provision for tax) fell 46.7% from INR162.14 billion in FY21 to INR86.41 billion in FY22. PAT of ICICI Bank saw an increase from INR161.93 billion in FY21 to INR233.39 billion in FY22. Net interest income of the bank saw 21.7% growth from INR389.89 billion in FY21 to INR474.66 billion in FY22. This was mainly led by a rise in NIM by 27 bps from 3.69% in FY21 to 3.96% in FY22. Apart from this, there was an increase of 13.5% in average interest-earning assets.

• Key highlights for 1Q23: ICICI Bank’s core operating profit (profit before provisions and tax, excluding treasury income) saw a growth of 19% year-on-year to INR10,273 crore (US$ 1.3 billion) in 1Q23. Growth was supported by higher net interest income, which grew 21% year-on-year in 1Q23. Value of its merchant acquiring transactions through UPI in 1Q23 grew 27% in comparison to preceding quarter and was 2.3x value of transactions in 1Q22. Retail loan portfolio saw 24% year-on-year growth. Including non-fund outstanding, retail portfolio made up 44.0% of its total portfolio as at June 30, 2022. Rural portfolio saw year-over-year growth of 8%. Its total period-end deposits grew 13% year-over-year to INR1,050,349 crore (US$ 133.0 billion) as at June 30, 2022. In 1Q23, PAT of ICICI Bank saw a growth of 50% year-on-year to INR6,905 crore. Its total period-end deposits saw an increase of 13% year-on-year and came in at INR1,050,349 crore as at June 30, 2022. Its average CASA ratio was 45.8% in 1Q23, while domestic loan portfolio saw 22% growth year-on-year. Finally, its net NPA ratio saw a decline and came at 0.70% as at June 30, 2022 from 0.76% as at Mar 31, 2022.

·        Stable capital adequacy: During pandemic, total capital adequacy of ICICI Bank as at September 30, 2020 including profits for 1H21 was 19.33% and Tier-1 capital adequacy was 17.89%. This was in comparison to minimum regulatory requirements of 11.08% and 9.08% respectively. Including profits for 1Q23, its total capital adequacy ratio as at June 30, 2022 came at 18.74% and Tier-1 capital adequacy was 17.95% against minimum regulatory requirements of 11.70% and 9.70%, respectively.

·        Focusing on digital initiatives: During 2Q21, ICICI Bank launched iStartup 2.0 programme, enabling startups to open current accounts digitally and instantly. This also offers startups several banking and non-banking services which can help in expansion. ICICI Bank saw an increase in adoption of newly launched services and platforms. When we talk about digital sourcing, ICICI bank has seen some momentum. This trend continued in 1Q23.

• Favourable industry dynamics: During FY16–FY20, credit growth compounded at 13.93%. As of FY20, total credit extended surged to USD1,936.29 billion. During FY16–FY20, deposit growth compounded at 6.81% and reached USD1.90 trillion by FY20. Credit to non-food industries saw an increase of 3.3% year-over-year, reaching USD1.26 trillion on February 28, 2020 and USD1.42 trillion on March 13, 2020. Enhanced spending on infrastructure, implementation of projects and continuation of reforms should provide further impetus to growth in Indian banking sector. Growing business needs and rapid pace of economic activities should act as an added advantage. Country’s digital lending was USD75 billion in FY18 and should reach USD1 trillion by FY23 because of digital disbursements. By 2025, India's fintech market should touch INR6.2 trillion (US$ 83.48 billion). High net interest margins and low NPA levels should result in healthy business fundamentals.

·        Promising Strategy Provides Visibility of Earnings Growth: During fiscal 2020, ICICI bank was focused on strategic objective of risk calibrated profitable growth. Bank’s core operating profit grew 21.5% during fiscal 2020. Profit after tax increased from INR33.63 billion in fiscal 2019 to INR79.31 billion in fiscal 2020. Progress was made on increasing granularity of portfolio and enhancing customer franchise. Even now, ICICI bank continues to improve portfolio mix by advancing to higher rated well-established corporates. Maintenance of healthy provisioning coverage ratio and strong capital position provides visibility of earnings growth. Given ICICI bank’s core operating profitability, liquidity and capital adequacy, it should absorb impact of industry-specific challenges. In FY22, it followed a micro market-based approach to create efficient distribution and resource allocation strategy. Core operating profit grew 22.3% from INR313.51 billion in fiscal 2021 to INR383.47 billion in fiscal 2022, primarily due to higher net interest income.  

ICICI Bank Trades at Favourable Valuations

ICICI bank will continue to focus on re-engineering business processes and enhancing customer convenience through leveraging technology. Digital banking has received further push as limitations have increased on traditional ways of working because of pandemic. Strategic focus of the bank in FY22 was on growth in core operating profit. ICICI Bank targets grow strategically by building platforms and providing seamless journeys to customers. Diversified and granular loan book is expected to support growth over long-term. Retail portfolio of the bank is largely secured and has been built on proprietary data and analytics in addition to bureau checks. In relation to risk, it is well-priced.

ICICI Bank should be able to optimally invest in building new growth runways. ICICI Bank needs to sustain accelerated efforts at improving its market share through continued investments in new avenues. It can further leverage ecosystem banking (wholesale banking) and NTB customer funnels (retail banking).

ICICI Bank saw strong operating performance mainly because of impressive core PPOP performance and better management of provisions. This is expected to continue in for next few quarters, which should result in growth in stock price growth. Strong growth in deposits and advances was seen. Business growth was much better than its peers as its asset quality saw some improvement. Apart from this, its NPA levels continued to fall.

ICICI bank has a market capitalisation of INR5,82,28,779.50 lakhs and free-float market cap of INR5,82,99,041.90 lakhs. Its stock trades at 24.8x FY22 earnings which is at a deep discount to sectoral average of 37.65x, favouring long position. Moving forward, growth of ICICI Bank is likely to stem from healthy capital position, strong penetration in addressable market and favourable industrial dynamics. 

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