ICICI Bank rating – Buy: An impressive performance in Q4

ICICI Bank’s profit in Q4FY22 of DKK 70 billion Rs, an increase of 59% year-on-year, was ahead of estimate and better in terms of quality with an increase of 21% on an annual basis in NII, an increase of 19% in core operations. profit, low credit costs of 0.5% and ROA of 2.1%. Normalized ROA can be slightly lower as credit costs are normalized back to 20-25% of up. profit against 11% in Q4. The escalation of SMEs and retail banking will continue to support growth and ROA. We hold ICICIB among our top picks with PT at 1,070 Rs. Buy.

Well-rounded performance: ICICI Bank’s performance in Q4 was impressive with (i) loans growing by 17% year / year / 6% qoq led by SMEs and retail; (ii) NIM up to 16bps y / y / stable qoq and helps with NII growth of 21% year-on-year and core PPOP growth of 19% year-on-year; (iii) slippages stable at 2.3% of recent years’ loans (annual basis), which led to credit costs moderating to a low of 0.5% of average loans. Net NPL is at 0.8% and non-NPL stressed loans at 2.4% and buffer provisions at 1.4% of the loans. Fee growth was slightly softer by 14% year-on-year, albeit on a normalized basis. Growth and margins have also been supported by a healthy growth in Casa deposits of 20% year-on-year, with the Casa ratio rising to 49%.

ROA crosses 2%, but sustainable ROA may be a bit lower: It is encouraging to see that ICICI Bank, with a combination of improvements in NIM and reduction in credit costs, has been able to expand its ROA to 2.1%, which now comparable to the industry’s best levels. However, given that credit costs during the 4th quarter were significantly below normal (11% of operating profit vs. guidance of 20-25%), we believe that as credit costs normalize, ROA will move towards 1.8- 2% levels.
SMEs will be the next big opportunity: ICICIB has increased its Insta-biz platform for SMEs – volumes here increased by 44% and loans in SME + Business Banking increased by 39%. Its initiatives in online commerce, supply chain financing, EXIM trading, automated reconciliation and partnerships along with new platforms like OCEN, Account Aggregators, can help increase this segment. We see the segment grow by 25% CAGR over FY22-24 and help with better margins and ROA.

Improvement in ROE will drive the next stage of revaluation: We raise earnings by 2-3%, and as highlighted in a recent report, an improvement in ROA / ROE will drive the next stage of revaluation of valuations. We see ICICI Bank deliver 17% CAGR in profit over FY22-24 and ROE of 16%. We maintain ICICI among our top pics in the sector with Buy rating and price target of Rs 1,070 (Rs 1,050 previously) based on 2.8x Mar-24E adjusted PB; for ADR, our PT costs $ 28.

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