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Event update: ICICI Bank (Outperformer) - Analyst Day is proof that ICBK is now one bank, one RoE

ICICI Bank hosted an analyst day. The focus was to highlight strategy, risk management and digital capabilities around each of the key business segments in retail and wholesale banking. The bank showcased the progress it had made on its digital capabilities with an ‘experience’ session at the end where the bank showcased its key digital offerings including insta savings and other insta products, trade and business apps, supply chain solutions, FASTag (electronic toll collection), API led solutions, data analytics. The bank has also started using satellite based apps to monitor portfolios. The meet was mainly to familiarize analysts with the processes, risk management and digital capabilities of each segment rather than talk about specific financials.

Our view: The analyst meet sharpened our conviction that ICICI will not only achieve its guided RoE of 15% in the near term (June 2020) but is also undergoing a big DNA change under the new CEO with all segments of the bank unitedly focusing on risk- mitigated operating profit rather than market share acquisition / loan growth which was the focus under previous CEOs. This not only improves visibility on near term RoE but gives us comfort that the bank is building a long-term, counter-cyclical business model with an uncompromising focus on risks and profitable growth. While the feedback on ICICI Bank’s retail, mobile banking app has been consistently positive, the other digital strengths that ICICI presented yesterday are less known, impressive and underappreciated partly because ICICI Bank so far had talked less about digital achievements compared to other banks. With yesterday’s its presentations and the experience session, that communication gap has now closed. While all presentations were detailed and informative, we were particularly impressed by the presentation on transaction banking. We reiterate Outperformer as we see ICICI Bank focussing on sustainable long-term profitability as opposed to short-term market share gains. Karvy will likely slip into the NPA bucket but the loan is backed by personal guarantee of the promoter and the bank will take the legal route to recover their dues by seeking rights to sell promoter shares in the digital arm and properties.

The key takeaways of the analyst day were

 1) One bank, one RoE, one KPI has brought about a DNA change: Under the new CEO the core principle on which every business strategy is based is one bank, one RoE, one KPI where all business segments seamlessly work to cater to all banking needs of a client irrespective of who on boards the client. All segments of the bank are completely aligned to this principle which helps the bank serve the banking needs of the entire ecosystem associated with the client. The key KRA across segments is to generate risk mitigated RoE not to generate market share or loan growth. This is a big DNA change for ICICI Bank under the CEO. Historically ICICI Bank had a big focus on loan market share.  

2) Digital focus to lower operating and credit cost, and generate higher fees: ICICI has made substantial investments in its digital platforms and has emerged as a digital powerhouse Digital excellence is embedded in the strategy of each business segment. Focus on digital helps improve fee income, reduce opex and credit costs as algo- based risk assessment helps identify risks better than manual assessments

3) Corporate strategy seeks return of and return on capital: To ensure that ICICI Bank does not encounter huge asset quality issues like it did in the past cycles, the two key elements of the corporate strategy are return of capital and return on capital. For ensuring return of capital - the bank has set hard limits on exposure to a single company group or industry, kept A- as the cut off rating for new corporate loans and beefed up pre-sanctioning checks using data analytics. For improving return on capital the bank has increased focus on transaction banking and on other sources of fee income. 

4) Information gathered on various exposures of ICICI from industry sources: ICICI did not discuss specifics except for Karvy but based on our interactions with the bank management and with other bankers post earnings here are a few key highlights on specific loans

• DHFL is NPL and fully provided for.
• Exposure to Karvy (Rs8.8bn according to MCA) will likely become non-performing but the bank will take the legal route to recover dues. ICICI is the settlement banker for Karvy and did not have the right to access data from the depository on whether  Karvy was pledging even fully paid shares of customers. With brokers being barred from raising loans from banks / other lenders against the pledge of shares from end September, the going will get tough for brokers who do not have enough equity.
• Guarantees towards spectrum payment given to telecom operators are not risk-free and can be invoked. There is still some confusion on whether a guarantee can still be invoked by DoT after due date. So the notion that liability ends if a bank refuses to roll over the guarantee may be misplaced.
• Contrary to reports, Sadbhav Engineering has not been added to the watch list in 2Q.
• Some domestic or overseas manufacturing plant (s) can get added to the watch list.
• Management has been highlighting that the watch list will increase due to a weak macro but credit cost will still remain contained. We note that despite this warning ICICI’s name does not appear in stress loans except Karvy and Voda Idea (which after the price hike has been knocked off the stress list for the banking industry)

5) The opportunity size has increased in both corporate and retail businesses.

• In retail loans, the opportunity comes from NBFCs vacating the space and growing digital penetration in Tier 3 & 4 cities.
• In corporate loans the opportunity has expanded because there are very few corporate banks that have the capital and the consistency of meeting corporate needs because financials have deteriorated for many state owned and private banks. Corporates have realized this and are now looking at a smaller consortiums of banks.
• Despite the huge opportunity, ICICI Bank’s focus will be on acquiring only profitable / risk mitigated market share rather than being carried away by the supply side constraints. The expanded opportunity gives ICICI Bank the option to be selective.

6) Unsecured loans : While unsecured loans have grown strongly at a CAGR of 41% over FY15 – 1HFY20, a large proportion of these loans are to existing liability customers, so risks are well-contained. Not only are there thorough pre-sanctioning checks but post sanction monitoring has also been beefed up.

7) ICICI has brought back focus on business banking and SME.  The focus in business banking is on seeking better collateral, going granular, customized product offerings and tie-ups with fintechs.

8) The bank has built a robust transaction banking platform. ICICI Bank has made good progress on transaction banking with 9% share in tax collections, 8% in bank guarantees, 7% in LCs, 10% in imports and 5% in exports. The digital strides in transaction banking have helped improve share of current accounts and fees.

9) With huge focus on digital, the bank is now reaping benefits from its digital investments.