ICICI Bank, one of India’s largest private sector banks, offers a diversified portfolio of financial products and services to retail, SME and corporate customers. The bank has an extensive network of branches and ATMs. It offers state-of-the-art services through digital channels like mobile and internet banking by leveraging on emerging technologies.
ICICI Bank’s strategy revolves around gaining efficiency with scale. The bank’s long-term growth strategy involves using efficient processes, leveraging on its extensive branch network, using its digital channels and partnership network optimally to expand its customer base and generate higher business from its existing customers. The bank offers a comprehensive suite of products and services to customers. These include saving, investment, credit and protection products based on customer needs, along with convenient payment and transaction banking services. The bank also cross-sells products to existing customers based on analytics.
Higher focus towards retail loans:
ICICI has been focusing on retail loans, which is a lucrative business segment carrying lower risk than corporate lending. Retail loans as a proportion of total loans is 62.6% as of December 31, 2019. Including non-fund based outstanding, the share of the retail portfolio was at 52% of the total portfolio as of December 31, 2019. Retail loans saw healthy growth at 19.3% y-o-y for Q3FY20.
Improving asset quality:
Net NPA (non-performing assets) ratio declined to 1.49% at December 31, 2019 from 2.58% at December 31, 2018. Provision coverage ratio (PCR) was healthy at 76.2%. The management has clarified that for FY19, there is no reportable divergence in NPA provisioning, as per RBI guidelines. We expect slippages to remain under control as ICICI Bank has limited exposures to defaulting borrowers.
Building a retail bank with a digital edge:
ICICI Bank is leveraging digital platforms and solutions, using advanced analytics and strong risk and collection management. ICICI Bank has digitized its personal loan portfolio and is using predictive analytics for risk management. The bank believes that digitization will not only reduce opex (operating expenditure) and enhance revenues, but also reduce loan loss provisioning, thereby enhancing profitability.
Strong operating performance:
ICICI Bank reported very strong 9M FY20 performance; it reported highest quarterly profits in Q3 supported by Essar Steel resolution. Q3 Net interest income (NII) grew by 24.3% y-o-y while PAT increased 158% y-o-y to Rs.4,146 cr. Core operating profit increased by 23.8% y-o-y to Rs.7,017 cr. in Q3. Average CASA (current account savings account) deposits grew 14.6% y-o-y. We expect the bank to report healthy operating performance.
The Indian banking system consists of 27 public sector banks, 21 private sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative banks, in addition to cooperative credit institutions. In FY07-18, total lending increased at a CAGR (compound annual growth rate) of 10.94 per cent and total deposits increased at a CAGR of 11.66 per cent. India’s retail credit market is the fourth largest in the emerging countries. It increased to US$ 281 billion on December 2017 from US$ 181 billion on December 2014.
Indian banks are increasingly focusing on adopting integrated approach to risk management. Banks have already embraced the international banking supervision accord of Basel II, and majority of the banks already meet capital requirements of Basel III, which has a deadline of 31 March 2019.
Reserve Bank of India (RBI) has decided to set up Public Credit Registry (PCR) an extensive database of credit information which is accessible to all stakeholders. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 Bill has been passed and is expected to strengthen the banking sector.
Credit off-take has been surging ahead over the past decade, aided by strong economic growth, rising disposable incomes, increasing consumerism & easier access to credit.
|Particulars||FY17||FY18||FY19||FY20 E||FY21 E||FY22 E|
|Net Interest Income||21737.32||23025.84||27014.79||32059.38||37295.83||43377.60|
|Pre Provisioning Operating Profit||26486.74||24741.53||23437.89||27765.06||32567.19||38178.87|
|Provisions and Contingencies||15208.14||17306.98||19661.14||11086.00||10000.00||12000.00|
|Profit Before Tax||11278.60||7434.55||3776.75||16679.06||22567.19||26178.87|
|Profit After Tax||9801.08||6777.42||3363.29||9609.29||16925.39||19634.16|
ICICI Bank has built a healthy liability franchise, strong digital capabilities, limited corporate stress, high PCR at 76%, steady growth and improving margins. We value ICICI Bank’s core banking business at 2.3x FY21 ABV (average book value) and subsidiaries at Rs.114 (post holding co. discount), arriving at TP of Rs.560.