Key takeaway: Our recent interaction with management, indicates business momentum has picked up with economic activity. Slippages may step down from 2Q (QoQ terms) and move towards normalcy from 2HFY22. ICICI is carrying reasonable provision buffer that should cushion provision. Over a medium term, margins can expand further as growth in SME and unsecured loans picks-up. ICICI Bank remains our top pick. Reiterate ‘Buy’.
Business has picked up June onwards: Management highlighted that business momentum has improved since June and given the rising pace of vaccination, this should accelerate further by December. In retail, loan demand in mortgage, cars and small business segments has been strong. CV and personal loan segments are lagging and are now at 80% of normalised levels, but this should improve in the coming months. In the corporate segment, ICICI Bank is adopting an ecosystem approach and is targeting calibrated growth by focusing on better rated corporates, with an eye on core operating profits by taking share in deposits, fees, salary A/C relationships.
Reasonable provision buffer; credit costs to normalise: Retail slippages has been higher than corporate. Slippages may stay elevated in 2Q given above normal overdue book as on June 30, but this should fall meaningfully in 2H. There could be more restructuring, mainly in its retail and SME portfolio in 2QFY22. ICICI Bank is carrying healthy buffer provision at 1.1% of loans that should absorb the impact on provisions. ICICI Bank plans to utilise excess provision after slippages normalise, though better clarity would emerge by March 22. Management expects credit costs to trend towards normalized levels of 25% of core operating profit (120-130bps).
Ramp-up of SME could be a positive: ICICI Bank expects to maintain margins around 1Q levels (+20bps YoY) near term. Deposit rates could edge higher, but this should be offset by a) lower negative carry as excess liquidity is unwound and b) lower interest reversals on NPLs. In the medium term, margins could expand led by pick up in credit growth picks, higher lending rates and growth in higher yielding SME and unsecured loans.
Investing in digitisation: ICICIBC continues to invest in digital and technology, focusing on aggregating data and leveraging it to add new customers or cross-sell to existing customer. It remains open to tie up with Fintechs. Tie up with Amazon on credit cards has helped. It is working with a number of Fintech players on merchant ecosystem.
Maintain ‘Buy’: ICICI Bank remains our top pick in the financial sector. We maintain ‘Buy’ with a PT of `900 based on 2.6x June 23 adjusted PB for the core bank.