ICICI Bank’s initiatives to de-risk loans have held it in good-stead with impact on asset quality likely to be manageable. An under-appreciated aspect is that its operating profit grew at 19-20% in FY19-20 & 18% YoY in first half of FY21. It has narrowed the gap with HDFC Bank and as retail growth & corporate-ecosystem banking pay-off with normal credit cost, ICICI Bank can grow normalised profits by 17-20%. Uptick in CASA growth is key for ICICI Bank.

Delivering a healthy operating profit growth:

It’s interesting to note that ICICI Bank has been able to improve growth in its operating profit (ex-treasury & dividend income) to 19%/20% over FY19/20 vs. -11%/+8% over FY17/18. Even during the first half of FY21, operating profits rose by 18% YoY. This has been aided by healthy growth in retail loans, better topline growth (NIMs and fees). In fact, better income growth has helped it to continue investing in distribution. As a result, ICICI Bank has also bridged the gap on this aspect with HDFC Bank, which has been consistent for much longer. Going forward, Jefferies believes that ICICI Bank will be able to leverage retail lending demand and even deepen relationships with corporate customers through ecosystem banking initiatives.

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Derisking initiatives to keep Covid impact manageable:

ICICI Bank has increased the share of A and above rated loans in loan mix from 63% in FY18 to 72% now. This was led by a rise in share of retail loans and increasing disbursements to A & above rated corporate. In retail lending, a larger proportion of loans are to vintage/ existing customers and salaried income groups. Hence, Jefferies expects the asset quality pressures to be manageable; after making 1.5% of loans in Covid provisions, management now expects provisioning costs to normalise. Jefferies expects provisioning to be around 2.5% in FY21 and 1.5% in FY22 – every 20bps change in credit cost would impact FY22E earnings by 6%.

Pick-up in CASA growth is key:

An area that Jefferies expects ICICI Bank to improve is on the CASA growth where it has seen moderation to 12% YoY in Sep-20, whereas HDFC Bank has improved momentum to 27% YoY. While ICICI Bank’s funding cost is among the lowest in the sector, a better growth in CASA will help to push-up growth on the lending side as well.


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