ICICI Bank’s Q4FY22 profit of Rs 70 bn, up 59% y-o-y, was ahead of estimate and better on quality with 21% y-o-y rise in NII, 19% rise in core op. profit, low credit cost of 0.5% and ROA at 2.1%. Normalised ROA can be a tad lower as credit costs normalise back to 20-25% of op. profit vs. 11% in Q4. Ramp-up of SME & retail banking will continue to aid growth and ROA. We hold ICICIB among our top picks with PT of Rs 1,070. Buy.
Well-rounded performance: ICICI Bank’s performance in Q4 was impressive with (i) loans growing by 17% y-o-y/ 6% q-o-q led by SME & retail; (ii) NIM up 16bps y-o-y/stable q-o-q and aiding NII growth of 21% y-o-y and core PPOP growth of 19% y-o-y; (iii) slippages stable at 2.3% of past year loans (annualised basis) that led to credit costs moderating to a low of 0.5% of average loans. Net NPL ratio is at 0.8% and non-NPL stressed loans at 2.4% and buffer-provisions at 1.4% of loans. Fee growth was a tad softer at 14% y-o-y, albeit on normalised base. Growth and margins have also been supported by healthy growth in Casa deposits at 20% y-o-y with Casa ratio rising to 49%.
ROA crosses 2%, but sustainable ROA may be tad lower: It is encouraging to see that with a combination of improvement in NIMs and reduction in credit costs, ICICI Bank has been able to expand its ROA to 2.1%, which is now comparable to industry-best levels. However, given that credit costs during Q4 were significantly below normal (11% of core operating profit vs. guidance of 20-25%), we believe that as credit costs normalise, ROA will move towards 1.8-2% levels.
SME will be the next big opportunity: ICICIB has been ramping up its Insta-biz platform for SME business – volumes here were up 44% and loans in SME + Business Banking rose by 39%. Its initiatives in online-trade, supply chain financing, EXIM trade, automated reconciliation and partnerships along with new platforms like OCEN, Account Aggregators, can help ramp up this segment. We see the segment growing at 25% CAGR over FY22-24 and aiding better margins and ROA.
Improvement in ROE will drive next leg of rerating: We raise earnings by 2-3% and as highlighted in a recent report, an improvement in ROA/ROE will drive the next-leg of re-rating in valuations. We see ICICI Bank delivering 17% CAGR in profit over FY22-24 and ROE of 16%. We maintain ICICI among our top-picks in sector with Buy rating and price target of Rs 1,070 (Rs 1,050 earlier) based on 2.8x Mar-24E adjusted PB; for ADR, our PT is at $28.