~100% earnings CAGR estimated over FY18-21e; one of the preferred picks in the sector; ‘Buy’ maintained.
As the corporate loan book reflects improved underwriting ability and a granular retail book (led by unsecured retail and cards) emerges as the largest contributor in the credit pie, we expect ICICI Bank to deliver ~100% earnings CAGR (low base effect as well) over FY18-21 (almost tripling of RoA to 1.2% by FY21e). Turnaround in asset quality is visible and management has maintained its credit cost guidance at 120-130 bps for FY20. Thus, the bank is best placed to play the NPA recovery cycle and offers healthy risk-reward at current levels. Reiterate ICICIBC as one of our preferred picks in the banking space with SoTP-based target price of Rs 500 (2.3x FY21e ABV on core book).
Impairment recognition at tail end
With signs of moderation in incremental NPA formation (slippages trending lower over last 4-5 quarters) and steady decline in below investment grade book (currently 2.6% of loans vs. 4.8% in Q1FY19), we expect slippage ratio to further trend lower and reach half of current levels (Q1FY20: 220 bps) to ~100 bps (the new normal). Given adequate provision coverage on NCLT accounts, we expect meaningful recovery through resolution route under IBC over the course of next 12 months.
Improved underwriting protocols to reflect in lower credit cost
Changes in risk management framework over the course of last three years (self-imposed concentration limits, higher mix of better-rated corporates) will likely result in lower credit cost. While near-term credit costs stay elevated due to ageing of NPAs, we expect credit cost to moderate to ~150 bps (from current level of ~250 bps) by FY21.
Multiple levers to drive margin expansion
Steady decline in overseas business mix (down ~500 bps at 10% of loans in last two years), rising mix of high-yield engines within retail (mix of unsecured retail, personal loans and CVs increased by ~270 bps over the past year to 19.6% of retail book) and declining pace of interest reversals will support gradual increase in NIM. We expect NIM at 3.6% by FY21, about 30 bps higher than FY19 levels.
Credit growth set to pick up led by retailisation
Average credit growth over last three years was muted at ~11% as the focus was to consolidate the balance sheet and tide over NPA issues. With recognition and impairment largely behind, we expect incremental narrative to shift towards growth factors. We expect advances to post 16.5% compound annual growth rate (CAGR) over next two years led by continued traction in retail advances (retail mix increased by ~15% over last three years to ~60%).
Strong capital levels to aid pick-up in growth
While most PSU banks, NBFCs and few high-growth private banks are finding it difficult to raise growth capital, ICICI Bank is well placed on capital front with Tier 1 Capital at 14.6% (Q1FY20). We believe the bank won’t need to raise capital for at least next 18 months to execute its growth plans.
Management transition behind; focus on core operating profit
Business model for ICICI Bank has stabilised with calibrated business approach and focus on building retail franchise. We believe the new management team under the leadership of Sandeep Bakhshi is set to deliver on key priorities with sharp focus on core operating profit growth. The bank is geared to grow businesses through partnership model—Cards (Amazon/Make My Trip), CVs (Indostar) and SME.