ICICI Bank is top pick in the banking space: Buy for target price of Rs. 1065 (55% Gain)

Best placed

We reiterate ICICI Bank as our top pick in the banking space given the visibility of 2% ROA by FY24E on the back of 21% CAGR in net profit over FY22-24E. Given the current increasing interest rate environment, the bank seems one of the best placed from ROA accretion perspective given its higher share of EBLR linkage, enabling faster transmission of rate increases on the asset side. We see few more levers to NIM expansion such as: (1) improving loan/deposit ratio and (2) increasing share of unsecured lending. Further, growth prospects seem far better for Large Cap banks given their low cost of funds (CoF) advantage vis-à-vis Small-Cap and Mid-Cap peers. This directly benefits ICICI Bank given it’s the market-leading position in Retail as well as Corporate segments. We estimate that ICICI Bank has gained market share in most Retail categories in the last 5 years. We expect the credit cost to remain benign given that in recent years we have seen the corporate NPA clean-up followed by covid-impact on the retail portfolio, which has resulted in restructuring of 1%. Overall stock of provisions seems adequate and does not warrant high credit cost in the medium term. The stock is currently trading at 1.8x FY24E ABVPS, which we believe is quite undemanding given the growth prospects and visibility of 2% ROA. We reiterate BUY on the stock with a target price (TP) of Rs1,065 (see SOTP table).

Higher EBLR-linkage places the bank favorably: In the current increasing interest rate environment, ICICI Bank seems well placed given that its loan book has 48% linkage to EBLR compared to 22-46% for most other banks under our coverage. This enables the bank to transmit increasing interest rates faster and derive higher yields. Within the total loan book, mortgage accounts for more than 34%. Overall, we estimate that ICICI Bank will see 25-30bps ROA expansion, taking into account the cumulative 90bps repo rate hike so far. Further, we see the increasing share of unsecured lending and an improving loan/deposit ratio as other potential levers, which could deliver NIM expansion.

Large Cap banks better placed to transmit systemic rate movements: We had outlined in our note that we see Large Cap banks being better placed in the current rising interest rate cycle given that they are more flexible, nimbler and overall better placed in terms of their ability to transmit systemic rate movements. Basis overall data collected, we argue that the Small-Cap and Mid-Cap banks tend to see higher quantum of deposit rate increases during an upward rate cycle. Note: this conclusion is subject to point-to-point comparison. Between Feb’18 and Apr’19, Large Cap banks had increased their deposit rates by 74bps on average while Small-Cap and Mid-Cap banks had increased their deposit rates by 111bps on average (~1.6x). The narrative holds true during a downward rate cycle as well, i.e., Large Cap banks tend to enjoy lower CoF far longer than Small-Cap and MidCap peers. Hence, overall, we believe that Large Cap banks such as ICICI Bank are well placed to effectively compete for growth without compromising on margins. We have increased our NIM estimates for ICICI Bank by 8- 12bps over FY23-24E to 4%.

Expect well-rounded growth given bank’s strong market share: Overall, we expect system credit growth to be well-rounded. Retail growth is expected to be supported by increasing penetration across sub-segments such as mortgages and unsecured loans. Easing supply-chain constraints would be beneficial for auto sector’s growth. On the wholesale side, SMEs have seen cash flows recovering post the covid impact and therefore have much healthier balance sheets today. Corporate sector is expected to see capex revival, which augurs well for corporate credit growth. Given the ICICI Bank’s market positioning, the bank is very well positioned. We have attempted to map ICICI Bank’s market share in various categories. We estimate that the bank’s market share is: 18.4% in mortgages (+354bps since FY17), 16.3% in SME/commercial loans (+574bps since FY17), 5.9% in personal loans (+211bps since FY17) and 17% in credit cards (+249bps since FY17). Overall, ICICI Bank has a systemic credit market share of 7.3%, up 68bps since FY17.

Asset quality outlook is positive; balance sheet is well provided for: Overall asset quality is expected to improve. For a better perspective, we see the bank’s book having gone through back-to-back asset quality cycles: (1) corporate NPA cycle followed by (2) retail book being tested for the covid impact. The net result of the latter has been a restructured book of 1%. The bank’s balance sheet is well provided for, with NPA coverage of ~80% and non-NPA provisions of 2.1%. It has increased coverage on restructured loans to 31% in 4QFY22 from 25% in 3QFY22. The bank has been prudent in building up provisions. In 4QFY22, almost all the provisioning went towards shoring up contingent provisioning buffers. We expect overall credit cost to average ~1% over FY23-24E.