ICICI Bank rating: Maintain with target price of Rs 525

By: |
July 28, 2020 8:13 AM

ICICI Bank’s (ICICI) Q1FY21 PAT of Rs 26 billion came broadly in line with estimate.

ICICI Bank rating, Covid-19, bank moratorium book, HDFC, headline asset quality , credit cost, systemic asset quality, latest news on ICICI bankSofter loan growth (7%, lockdown quarter) and higher deposit growth (up ~21%, reflection of strong franchise) created liquidity glut, impacting NIM (down 18bps QoQ). Operational cost economies helped.

ICICI Bank’s (ICICI) Q1FY21 PAT of Rs 26 billion came broadly in line with estimate. Credit cost was high due to Covid-19-related Rs 55.5 billion provision, taking total such provisions to 1.3% of loans and 7.5% of loans now under moratorium (17.5% of total). Stable core income cushioned the earnings impact. Expectedly, headline asset quality hardly budged with slippages restricted to sub-1%. Coverage improved further to ~78%, bolstering comfort.

Softer loan growth (7%, lockdown quarter) and higher deposit growth (up ~21%, reflection of strong franchise) created liquidity glut, impacting NIM (down 18bps QoQ). Operational cost economies helped. As argued in our report, The Abyss and the Light beyond, our prognosis of systemic asset quality remains rather bleak. But, in terms of the gap between reported net worth and ‘true residual equity’, ICICI is in the top decile in our banking coverage universe. With incremental Covid-19 provisioning of a quarter of our estimated full cycle credit impact and near certainty of a capital raise, ‘equity certainty’ and post cycle competitiveness now get a further material boost. Thus, we raise our core multiple to 2.3x (from 2.0x on ‘true FY20 BVPS’) leading to revised SOTP-based TP of Rs 525 (earlier Rs 480). Maintain ‘buy’ on our top sector pick. Sizeable value contribution from subsidiaries that are primarily our favoured ‘money-in’ businesses add to our comfort.

Slippages moderated to sub-Rs 12 billion (sub-1% versus 2.3% run rate over past six quarters), partially reflecting impact of standstill following moratorium option at play. The bank proactively made higher provisions (Rs 55.5 billion for Covid-19) with coverage rising to >78%. ICICI now holds Covid-19 provisions of Rs 82.75 billion, implying 1.3% of loans and 7.5% of moratorium book. The bank’s moratorium book stood at 17.5% (down from 30.0% earlier). On the face of it, this looks high vis-a-vis peers Axis/HDFC (at sub-10%). But, as is clear by now, banks have taken widely different approaches to the moartorium option, even for similar segments and geographies, rendering direct comparison moot. We believe, headline asset quality pressures will manifest in H2FY21/H1FY22. Meanwhile, provision buffer will continue to build up, which is likely to keep credit cost high.

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