Maintain BUY on ICICI Bank - More hits than misses; primed for multiple re-rating - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

ICICI Bank reported a positive surprise on most operating metrics as the bank navigated through a difficult quarter with very few misses. Restructured loans were benign at 0.4% of loans (two-thirds from corporate pool) while pro forma slippages clocked in at 1.2% of loans (90% from retail portfolio). ICICI Bank ticks most boxes on the asset quality front in terms of a handle on the sources of potential stress, the likely pace of incremental stress accretion and the need for incremental provisions. Incrementally, the bank's comfort and confidence in kick-starting growth in its corporate portfolio holds a gradual re-rating potential. We maintain BUY with a SOTP-based revised TP of INR 625 (standalone bank: 79% of SOTP valuation).

Pro forma slippages dominated by retail: Pro forma slippages clocked in at INR82bn (~1.2% of loans) while the bank received restructuring proposals to the tune of 0.4% of loans. Retail loans accounted for ~90% of the pro forma slippages and one-third of the restructuring proposals. A larger system-wide issue revolves around the potential stress building up even in mortgage loans, which are symptomatic of continued weak cash flows for borrowers. We build in slippages of 2.5% over FY21-23E.

Conservative and adequate provisions: ICICI Bank continued to build its standard asset cover with a net addition of INR1.2bn during the quarter towards potential stress. The bank has also prudently raised its provisioning policy on early-vintage stress buckets (higher provisions on sub-standard assets), which reduces the scope for potential P&L shocks in the future. Moderating provisions are likely to be the biggest driver of return ratios. We expect LLPs of 1.6% over FY21-23E.

Ripe for de-anchoring from Axis Bank: With standalone RoAs likely to inch to 1.8% by FY23E (almost completely driven by continued normalization of credit costs) and a gradual diversification of profitability engines, we envision ICICIBC to embark a smoother to its franchise RoE (vs. AXSB). This trend will warrant a higher multiple. This underpins the revision in our target multiple from 1.9x to 2.0x FY23E ABV.

Shares of ICICI BANK LTD. was last trading in BSE at Rs.622.25 as compared to the previous close of Rs. 617.25. The total number of shares traded during the day was 2689546 in over 11080 trades.

The stock hit an intraday high of Rs. 627.5 and intraday low of 614. The net turnover during the day was Rs. 1673311096.

Source : Equity Bulls

Keywords