ICICI Bank Rating: Buy-Excellent performance by the company

ICICI Bank’s Q2FY21 result was marginally ahead of our expectations with 18% y-o-y core PPOP growth, aided by a rebound in fees offsetting the 10bp q-o-q NIM compression. Domestic growth was strong at 5% q-o-q, offsetting drags from international book. Retail growth of 6% q-o-q (13% y-o-y) was aided by: (i) autos, business banking moving back to pre-COVID levels; (ii) mortgage, rural portfolio disbursals higher than pre-COVID levels; and (iii) unsecured segment nearing pre-COVID levels. Retail collections improved meaningfully to 96-97% of pre-COVID levels.

We build in credit cost of 235/170bp for FY21/22F (250/205bp earlier) but see high likelihood of credit cost undershooting in FY22 itself. We raise core PPOP estimates by 9-10% and lower credit cost, leading to a 10-20% increase in FY21-23F EPS estimates. We maintain Buy and retain ICICI as our top pick within banks with a higher TP of Rs 525 (1.7x Sep-22 book+ subs value Rs 117).

Operationally a strong quarter: Core PPOP growth of 18% y-o-y was 3% ahead of our expectations, with: (i) better than expected fees (down 10% y-o-y), netting off (ii) 10bp q/q NIM compression due to higher liquidity on B/S; (iii) growth trends were encouraging with 6% q-o-q growth in retail, aided by 21/12% q-o-q growth in business banking/SME (partly aided by ELCGS scheme), higher than pre-COVID disbursals in mortgage and rural portfolios and auto reaching back to pre-COVID levels; and (iv) BB & below book stands at Rs 162 bn (2.5% of loans), but 82% PCR, Rs 88 bn of COVID provisions (130bp of loans) and lower restructuring expected in corporate (<1% expected to be restructured) provides comfort for credit cost to likely normalise in FY22 itself.

Collection trends encouraging: Retail collection efficiency was at 97% of pre-COVID levels in Sep, with most segments seeing a sharp recovery; retail and card overdues are 4% higher vs normal levels. SME/ business banking is back to pre-COVID levels (partly aided by ELCGS scheme). Rural portfolio overdues is only 1% higher than pre-COVID levels. Corporate overdues is 3%, but mgmt expects <1% of the book to be restructured.

Valuations provide enough downside comfort: We expect ROEs to normalise to 12/15% in FY22/23F with a potential risk of credit cost undershooting, we think valuations at 1.2x Sep-22 book provide enough downside support. We thus retain ICICI as our top pick and raise our TP to Rs 525, implying 1.7x Sep-22 core book (multiple unchanged) +subs value of Rs 117.