Buy ICICI Bank; target of Rs 500: YES Securities

YES Securities' research report on ICICI Bank

ICICI Bank’s core PPOP was 15% higher than our estimate, courtesy a better NII growth and a relatively resilient fee performance despite substantially lower activity levels. Opex also stood below our estimate. Bank prudently utilized large gains (Rs30.3bn) on partial stake sale in insurance subs. (3.9% in ILOM and 1.5% in I-Pru) for significantly augmenting covid provisions (1.3% of loan book), largely cushioning the balance sheet. NIM came off with built-up in liquidity surplus, consequence of deposits growing 4% qoq and loans contracting 2% qoq. Lack of credit demand lead to liquidity deployment in investments at 30-50bps margin. Portfolio under morat was at 17.5% as of June 30, much lower than 30% as of April end. Additionally, 2-3% of the loan book is overdue (had taken the 1st morat). Within June morat, ~90% customers were from 1st morat. The morat % is higher in CV finance, dealer funding and builder loans. ~97% of PL and Card customers who have taken morat continue to receive salaries. Management sounded reasonably confident about portfolio quality, citing that PAR % is declining fast. Covid provisions are against specific portfolios and would be drawn down when such loans slip. CET-1 ratio was at 13.6%, and the planned equity raise of Rs150bn (200 bps of RWA) would further bolster it. The bank intends to be well positioned for future growth.

Outlook

Maintain BUY with an upgraded TP of Rs500. Revise EPS/ABV estimates upwards on stronger PPOP show and capital raise. Earnings metrics to bounce back in FY22. Core bank trades at 1.3x FY22E P/ABV; insurance and AMC subs will continue to accrete value (Rs118/share now).

ICICI Bank 27072020-yes