Buffer provisions were a drag; estimates tweaked to factor in results and Covid surge; poised for re-rating in valuations; Buy retained
ICICIB’s profit for Q4FY21 at Rs 44 bn (Rs 12 bn last year) was below estimate as buffer provisions & lower treasury offset healthy op. profit growth of 21%. We are encouraged to see 20% y-o-y growth in retail loans (HDFCB at 7%) & avg. CASA growth of 24% (HDFCB 27%). Asset quality is manageable & buffer provision at 1.2% of loans; Covid has affected business, but mgt. feels it’s early to assess. We tweak earnings & see ROE rising to 14-15%; ICICI stays among top sector picks.
Healthy PPOP growth led by CASA and retail lending: ICICI Bank continues to deliver well on operating profits (ex-treasury & dividends) with growth of 21% y-o-y aided by NII growth of 17% y-o-y. Mgt. highlighted that retail growth was driven by investment in distribution as well as cross-sell initiatives. Overall loans grew at 14% – domestic corp. loans rose by 10%, but the bank is unwinding foreign loans (down 30% y-o-y). We are a tad disappointed by the slower rise in fees (6% y-o-y on lower base).
Slippages manageable; contingent provisions lifted: Slippages for Q4 (adj. for proforma slippages of past) were in line with expectations and annualised at 3.4% of past year loans. Retail delinquency ratio has increased over the past year, reflecting the impact of Covid and growth in non-mortgage loans. Overdue loans (that are not NPLs) are getting closer to pre-Covid levels. BB rated book is at 2.4% and ECLGS loans at 1.9% that cover ~12% of loans. The bank made additional contingent provisions of Rs 10 bn and buffer provisions have risen to 1.2% of loans.
Maintain BUY: We tweak our earnings estimates to factor in results and some impact from the surge in Covid cases. Still, we believe that core operating results and asset quality trends are faring well and hence we see drivers of falling volatility in earnings in place. As discussed earlier, we believe ICICI Bank is well placed to see re-rating in valuations with healthy growth and lower volatility. We maintain our Buy call with an SOTP-based TP of Rs 780 that includes value of bank at 2.4x Mar-23E adjusted PB. Our price target for ADR (rated BUY) is $20, based on fx conversion & ADR factor of local price target.