ICICI Bank delivered strong Q3 FY21 results with a big core PPOP beat (+17.7% YoY), just 1.1% slippage and less than 0.4% in restructuring, leading to almost normalised profitability in Q3 FY21 itself (14% ROE). The retail slippage spike (2x vs FY20) for ICICI Bank was better than expected and corporate slippage of 1% of loans was a big positive surprise, and highlights its improvement in underwriting over the past 3-4 years. ICICI Bank share price today is Rs 616, up Rs 8 or 1.3%.

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CLSA increased their earnings 9%-18% over FY21-23CL factoring in lower credit costs and a better PPOP. CLSA expects ICICI Bank’s ROE to normalise at +15% by FY23CL with potential upside driven by the under-shooting of credit costs over the next two years. CLSA expects ICICI Bank’s rerating journey to continue and hence increase their target price from Rs 675 to Rs 800 (2.5x March 23CL book and Rs155/sh in subsidiary value).

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ICICI Bank Asset quality: inflection point; CLSA expect 100-120bps in credit costs:

ICICI Bank’s slippage of Rs 70 bn (1.1% of loans) and restructuring at less than 0.4% of loans surprised positively to investors. ICICI Bank had +30% NPA formations in corporate book over FY15 - 20 and 9M FY21 slippage of just 1% in its corporate book clearly indicates a big turning point. Retail slippage was 2.25% in 9M FY21 and would double to +3% versus FY20 but that is manageable in the context of the pandemic. ICICI Bank is carrying Rs78bn in non-NPA provisioning which will provide a buffer against risk (ECLGS and restructuring). CLSA expects credit costs to normalise to 120/100bps in FY22/23CL with the potential to undershoot long-term average credit costs.

ICICI Bank Positive surprise on core PPOP and strong pick-up in growth:

Core PPOP growth grew 18% YoY and beat their estimate by 4%. ICICI Bank’s domestic growth surprised with the sector high 7.5% QoQ growth and 12% growth over the past two quarters driven by 7.5% QoQ growth in retail loans. NIM improved by 10bps QoQ in spite of accounting for interest reversals. Management expects NIM to trend up further as interest reversals decline and excess liquidity is put to use as growth is picking up. CLSA lifted their FY22/23CL PPOP estimates by 8%.

Big inflection point; ROE of +15% and lift target price to Rs 800 (50% upside):

CLSA believes Q3 marks a big turning point for ICICI Bank as it marks an end of a huge corporate provisioning cycle (FY15-20) and provides comfort on the past 3-4 years of underwriting of the bank. With our 9%-18% earnings upgrade, CLSA now expects the banking ROE to improve to +15% in spite of the recent capital raise, and its ROE could move up further with improving leverage and the undershooting of credit costs.