ICICI Bank rating: Buy — Primed for healthy sustainable growth

By: |
Published: December 9, 2019 3:16:20 AM

Technology is key business enabler; RoA/RoE expected to improve to 1.6/15.7% in FY21e; TP revised to Rs 625

ICICI Bank rating, ICICIBC, One Bank One RoE, SME customers, BFSI space, banking sectorICICIBC has historically been a technology savvy bank with several innovations to its credit.

We attended ICICI Bank’s (ICICIBC’s) analyst day, wherein the bank highlighted the progress that its different businesses are making and how well it is positioned to capitalise on the exciting opportunities in financial services. The topics of discussion ranged around management’s efforts to build a strong bank with best-in-class digital capabilities, the usage of technology to accelerate growth across business verticals and maintain healthy operating metrics, collaboration with start-ups to offer improved customer proposition, penetrate newer markets and reduce operating costs, and maximisation of the risk calibrated core operating profit as it follows a ‘One Bank One RoE’ approach.

ICICIBC has historically been a technology savvy bank with several innovations to its credit. However, asset quality challenges over the past few years have taken centre stage and many digital capabilities were not getting duly appreciated. Over the past few years, the bank has been reporting strong growth in retail advances, supported by an impressive share of digital originations across key product lines. With asset quality issues getting sorted, ICICIBC appears firmly positioned to deliver healthy sustainable growth, led by continued investments in technology and further expansion in digital offerings. We thus estimate RoA/RoE improving to 1.6%/15.7% in FY21. Reiterate Buy with a revised SOTP-based target price of `625 (2.5x Sep’21E ABV), primarily as we roll forward our valuations.
Retail Banking – continued strong traction in building retail franchise

ICICIBC has been building strong digital capabilities with a focus on improving on all five key operating parameters: margins, fee income, acquisition cost, opex and credit cost. The bank aims to increase customer stickiness and further gain liability market share by offering a wide range of digital asset solutions to its customers. The bank sources 56% of its personal loans through digital channels, with ~75% of the unsecured products being sourced through its existing customers. ICICIBC has started offering online credit cards to pre-approved customers, while the effective use of technology has facilitated a significant improvement in opex and delinquency trends across key product segments. ICICIBC suggested robust traction in its unsecured loans business—it has reported a 41% CAGR since FY15.

Business Banking – growth engine set to revive

The business banking segment remains significantly under-penetrated and the bank has identified focus sectors like tourism, retail, e-commerce, IT and financial services for pursuing growth opportunities. ICICIBC has built customised digital solutions to accelerate growth in business banking and expects this segment to grow at 35-40% over the next few years.

Start-up engagements – collaborating with fintechs to achieve business goals

ICICIBC is engaging with various start-ups to provide improved customer proposition, penetrate into newer markets and reduce operating costs across product segments. For example, it has entered into a partnership with Factor HR to offer payroll solutions to its SME customers. It is making equity investments into high growth and disruptive fintech start-ups which help build cutting-edge customised banking solutions for customers.

Wholesale and transaction banking – credit framework strengthened; approach shifts to ‘One Bank One RoE’
Management has adopted a two-pronged strategy focusing on the quality of the portfolio and earnings. Key variable in wholesale banking is ‘lumpy provisions’ and the bank targets this to be limited to 20%-25% of core operating profits. Strong build-up in liability franchise has helped reduce funding cost, providing a competitive advantage to the bank. Wholesale banking segment now aims to tap opportunities across the entire business chain, rather than having separate business segments working in silos, as the bank has shifted its strategy to ‘One Bank One RoE’.
Valuation view

ICICIBC appears firmly positioned to deliver healthy sustainable growth, supported by continued investments in technology and expansion in its digital offerings. The bank has navigated well through a challenging macro environment with limited exposure to newly surfaced stressed names. It has in fact built one of the highest provisioning coverage in the banking sector. ICICIBC remains one of our top ideas in the BFSI space.


Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1Onion prices continue to bring tears, retailing at Rs 100-120 per kg in Bhopal
2Front running case: After Facebook, Sebi looks at matrimonial profiles to catch manipulators
3Global cues, macro-data to set tone for equity markets: Analysts