Call & Research Report by Institutional Research at HDFC Securities.
Analyst: Mr. Krishnan ASV
Report Date: 3 February 2021
CMP Rs. 537 Target price Rs. 625
ICICI Bank (Q3FY21 Results Review) |
More hits than misses;
primed for multiple re-rating. Maintain BUY
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.
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