ICICI Bank: Stable capital adequacy and Digital Initiatives Should Support Growth

Summary

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• During fiscal 2020, ICICI bank saw healthy growth in core operating profit and its capital and liquidity position was strong.
• ICICI bank will continue to build on its long-term strategic focus of growing core operating profits in risk calibrated and granular manner.
• ICICI bank aims to further strengthen liabilities franchise. Leveraging of extensive network with wide geographical reach and comprehensive range of products and services should help bank achieve sustainable profit growth.
• During fiscal 2020, franchise has been strengthened supporting robust flow of deposits during the year. Improvement in asset quality parameters was also seen with granular and stronger portfolio mix.

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About ICICI Bank

ICICI Bank is a leading private sector bank in India. Consolidated total assets of ICICI bank were INR14.76 trillion at September 30, 2020. It currently has network of 5,288 branches and 15,158 ATMs across India. ICICI Bank offers range of banking products and financial services to corporate and retail customers. This is being done through variety of delivery channels and through ICICI Bank’s group companies.

Growth Enablers of ICICI Bank

• Key highlights for 2Q21: ICICI Bank’s core operating profit was INR77.19 billion, exhibiting year-over-year growth of 18.1%. Bank saw strong deposit growth, with average savings account deposits increasing by 15.4% and average current account deposits increasing by 20.7%, both on year-over-year basis. Bank’s domestic loans grew 10.3% year-over-year and 4.5% quarter-on-quarter. Its provision coverage ratio increased to 81.5% as at September 30, 2020 and bank made Covid-19 related provisions of INR87.72 billion. With restrictions easing, ICICI Bank saw substantial month-on-month increase in disbursements across retail products. In 2Q21, mortgage disbursements crossed pre-Covid levels and reached all-time monthly high in September 2020. Momentum was also seen in Auto loan disbursements as these continued to increase from June 2020 and have reached pre-Covid levels in September 2020, exhibiting growth in passenger car sales. Recovery was also seen in credit card spends as spending increased in health & wellness, electronics and e-commerce.
• Stable capital adequacy: Total capital adequacy of ICICI Bank as at September 30, 2020 including profits for 1H21 was 19.33% and Tier-1 capital adequacy was 17.89%. This was in comparison to minimum regulatory requirements of 11.08% and 9.08% respectively. During 2Q, it raised equity capital of INR15,000 crore. Provision coverage ratio saw an increase from 78.6% at June 30, 2020 to 81.5% as at September 30, 2020. Its NII increased 16% year-on-year to INR9,366 crore in 2Q21 from INR8,057 crore in 2Q20.
• Focusing on digital initiatives: During 2Q21, ICICI Bank launched iStartup 2.0 programme, enabling startups to open current accounts digitally and instantly. This also offers startups several banking and non-banking services which can help in expansion. ICICI Bank saw an increase in adoption of newly launched services and platforms. When we talk about digital sourcing, ICICI bank has seen some momentum. With more and more Indians getting on board, it saw 53% of personal loans getting sourced and 55% SIPs getting initiated through digital channels.
• Momentum in credit growth should continue: In 2Q21, ICICI bank’s retail loan portfolio saw a growth of 13% year-over-year. Retail loans made up 65.8% of total loan portfolio at September 30, 2020. Including non-fund outstanding, retail accounted 53.6% of total portfolio at September 30, 2020. With restrictions easing and business activities across nation coming on track, credit growth should continue.
• Favourable industry dynamics: During FY16–FY20, credit growth compounded at 13.93%. As of FY20, total credit extended surged to USD1,936.29 billion. During FY16–FY20, deposit growth compounded at 6.81% and reached USD1.90 trillion by FY20. Credit to non-food industries saw an increase of 3.3% year-over-year, reaching USD1.26 trillion on February 28, 2020 and USD1.42 trillion on March 13, 2020. Enhanced spending on infrastructure, implementation of projects and continuation of reforms should provide further impetus to growth in Indian banking sector. Growing business needs and rapid pace of economic activities should act as an added advantage. The country’s digital lending was USD75 billion in FY18 and should reach USD1 trillion by FY23 because of digital disbursements.
• Promising Strategy Provides Visibility of Earnings Growth: During fiscal 2020, ICICI bank was focused on strategic objective of risk calibrated profitable growth. Bank’s core operating profit grew 21.5% during fiscal 2020. Profit after tax increased from INR33.63 billion in fiscal 2019 to INR79.31 billion in fiscal 2020. Progress was made on increasing granularity of portfolio and enhancing customer franchise. Retail loans as a proportion of total loans increased to 63.2% at March 31, 2020 from 60.1% at March 31, 2019. ICICI bank continued to improve portfolio mix by advancing to higher rated well-established corporates. Maintenance of healthy provisioning coverage ratio and strong capital position provides visibility of earnings growth. Given ICICI bank’s core operating profitability, liquidity and capital adequacy, it should absorb impact of industry-specific challenges. Focus is on further strengthening balance sheet as opportunities come. It will monitor evolving scenario and calibrate business on the basis of assessment of risk and profitability.

ICICI Bank Trades at Favourable Valuations

ICICI bank will continue to focus on re-engineering business processes and enhancing customer convenience through leveraging technology. Digital banking has received further push as limitations have increased on traditional ways of working because of pandemic. ICICI bank’s net interest income increased 23.1% from INR270.15 billion in fiscal 2019 to INR332.67 billion in fiscal 2020, exhibiting 13.1% increase in average volume of interest-earning assets and an increase in net interest margin by 31 bps to 3.73% in fiscal 2020 from 3.42% in fiscal 2019. During 2Q, gross additions to NPAs were INR3,017 crore. Recoveries and upgrades, excluding write-offs, from nonperforming loans were INR1,945 crore in 2Q. Net NPA ratio was 1.00% at September 30, 2020.

ICICI bank has a market capitalisation of INR3,47,42,365.00 lakhs and a free float market cap of INR3,46,21,345.74 lakhs. ICICI bank has compounded its core operating profit at ~7.87% and total assets at ~11.11%. Its stock trades at 41x FY20 earnings which is at a deep discount to sectoral average of 47.42x, favouring long position.

  

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This Article represents the Author's own personal views. The Author did not receive any compensation and do not have any business relationship with any of the companies mentioned in the Article.