ICICI Bank Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Core profit up 19%, credit buffer built: Core operating profit grew 19.4% YoY to ₹10,273 crore, while the bank added a ₹1,050 crore contingency provision, signaling caution on the macro environment despite strong current performance.
• Deposit franchise is the moat: Average current and savings account deposits grew 23% and 19% YoY respectively, keeping the cost of deposits among the lowest in the system at 3.46%, a critical advantage as the rate cycle turns.
• Retail loan engine firing, SME and business banking surging: The retail book grew 24.4% YoY, while business banking and SME portfolios grew 44.7% and 32.3% YoY respectively, driven by branch network leverage and digital offerings like InstaBIZ.
• Asset quality normalizing, not deteriorating: Net NPA additions of ₹382 crore were expected after a period of net deletions, with the Kisan Credit Card portfolio contributing a seasonal ₹755 crore spike. Management urges focus on net slippages, which remain low.
• What to watch next quarter: The pace of back-book repricing as lending rates catch up with benchmark hikes, the trajectory of retail slippages beyond the seasonal KCC spike, and any demand impact from rising rates and global slowdown fears.

Deposit Franchise & Margin Dynamics

• Low-cost deposit engine: Average current account deposits rose 23.0% YoY and average savings account deposits rose 19.1% YoY, reinforcing a liability franchise that keeps the cost of deposits at a system-leading 3.46%.
• Term deposit mix: A significant proportion of term deposits sits in the 1-year-plus maturity bucket, though management declined to provide a specific average duration figure.
• NIM stable with a tailwind: Net interest margin held flat sequentially at 4.01%, with a 3 bps boost from interest on an income tax refund. The domestic NIM edged up to 4.14% from 4.12% in Q4.
• Yield reset underway: Loan yields declined sequentially because competitive lending rates persisted into May and a day-count effect between Q4 and Q1 created an arithmetical drag. Management expects yields to now rise in line with benchmark increases, with no change in spreads.

Banerjee: "No. The reset will be to the extent that the benchmark changes. So, it will entirely reflect the change in the benchmark. There is no change in the spread."

Loan Growth & Segment Performance

• Broad-based growth with standout performers: The overall loan portfolio grew 21.3% YoY, led by business banking at 44.7% YoY, SME at 32.3% YoY, and retail at 24.4% YoY. Domestic corporate grew 14.4% YoY.
• SME and business banking transformation: Consistent growth over four years has been driven by changes in distribution, credit underwriting, portfolio granularity, and heavy investment in digital propositions. Post-COVID credit outcomes have been better than originally anticipated.
• Overseas book shifts toward India-linked trade: The overseas loan portfolio grew 7.4% YoY in USD terms, driven entirely by India-linked trade finance. The non-India linked corporate portfolio declined 52.8% YoY, or about \$513 million, as the bank deliberately shrinks that exposure.
• Branch expansion resumes: The bank added about 120 branches this quarter after a long pause, and the pace of additions could accelerate relative to the last two to three years, based on its own growth strategy.
• Demand resilience for now: Loan growth across sectors has held up well, and there appears to be fair resilience in demand in typical segments, though management will monitor the impact of rising rates as they flow through.

Asset Quality: Normalization, Not Alarm

• Net additions replace net deletions: The bank reported net additions of ₹382 crore to gross NPAs this quarter, compared to net deletions of ₹489 crore in Q4. This shift was expected as pandemic-era recoveries normalize.
• KCC seasonality drives the retail spike: Gross NPA additions of about ₹755 crore came from the Kisan Credit Card portfolio, where higher slippages are typical in the first and third quarters of a fiscal year.
• Focus on net, not gross, slippages: Management argues that in granular portfolios like retail, business banking, and SME, technical NPL classifications tend to cure quickly, unlike lumpy corporate exposures. Even adjusted for KCC, the net slippage trend is what matters, and it remains relatively low.
• Recovery engine still running: Recoveries and upgrades from gross NPAs, excluding write-offs and sale, were ₹5,443 crore, up from ₹4,693 crore in the previous quarter.
• Provisioning buffer strengthened: The bank added a ₹1,050 crore contingency provision on a prudent basis, bringing the total contingency buffer to ₹8,500 crore. Total provisions other than specific provisions on fund-based NPAs stand at ₹18,770 crore, or 2.1% of loans.

Banerjee: "we would really focus on the net number. And as far as the net number is concerned, we have been saying for some time that -- of course, in the second half of last year, we had net deletions to gross NPA. So that was due to higher recoveries out of the stock of NPAs that had got created during the pandemic period. And we were expecting that we would start seeing net addition from the current quarter, which is what has played out."

Operating Costs & Investment Intensity

• Cost spike has structural and one-off drivers: Operating expenses rose 25.3% YoY, partly reflecting a low base in Q1 last year. Employee expenses rose 20.0% YoY, driven by the addition of about 7,250 employees over 12 months, a ₹129 crore ESOP charge under new RBI guidelines that did not exist in the base quarter, and the impact of promotions and increments effective this quarter.
• Retail carries the cost base: 75-80% of the bank's cost base sits in the retail segment, so the sequential increase in costs largely reflects there, dragging retail segment profitability lower sequentially despite a YoY multiple jump.
• Technology spend is material and growing: Technology expenses account for about 8.5% of operating expenses, and non-employee expenses rose 28.8% YoY primarily due to retail business and technology-related spending.
• Investment stance unchanged: The bank will continue to invest in technology, people, distribution, and brand building, with no indication of pulling back to optimize short-term profitability.

Strategic Reorganization & Digital Build-Out

• Ecosystem-based organization: The bank is increasingly organizing around customer ecosystems with cross-functional teams, blurring traditional segment distinctions. Cities with large concentrated market opportunities have been placed under city business heads covering the full spectrum of ecosystems.
• InstaBIZ as an open-architecture platform: Merchants can now open a current account instantly and digitally on InstaBIZ using video KYC, and non-ICICI Bank customers can avail an overdraft facility of up to ₹0.25 crore instantly through InstaOD Plus. About 120,000 registrations from non-ICICI Bank account holders had been recorded by June 30, 2022.
• Supply chain and industry platforms launched: The bank launched a revamped OneSCF, an integrated supply chain platform for corporate customers and their ecosystems, and has created more than 20 industry-specific STACKs providing bespoke digital solutions to corporate clients.
• Campus Power targets the student ecosystem: A new online platform provides banking solutions including loans, accounts, foreign exchange remittances, and value-added services to students pursuing higher education in India and abroad.

Banerjee: "The last thing I would like to say is that we are increasingly trying to organize ourselves around ecosystems. So, there is a lot of sort of how should I say it, for the regulatory requirements we would be reporting a segmental basis, but the way we are organized internally is much more around crossfunctional teams and looking at particular customer ecosystems where these distinctions are quite blurred in that sense."

Macro Hedging & Capital Prudence

• Contingency provision is a macro hedge: Despite benign current credit trends, management added ₹1,050 crore to the contingency buffer, citing potential headwinds from inflation, rising rates, and a potential sharp slowdown in major economies. The provision was made by looking at risk markers across a broad range of portfolios, not just the below-investment-grade book.
• Rating mix improving: The proportion of the portfolio rated AA- and above moved from 36% to 47%, driven by upgrades from the A family, while the A- and above bracket remained broadly stable.
• Unsecured book needs no cap yet: Management sees nothing in current credit trends to warrant imposing a cap on the unsecured lending mix, though revolver rates remain below pre-pandemic levels and the bank hopes they will start moving up as spending picks up.
• Provisioning ratio maintained: The bank continues to target provisioning at around 20% of core operating profit, a framework it has operated within consistently.

Banerjee: "there are potential headwinds in the environment given what is happening on inflation and rates and potentially a sharp slowdown in growth in major economies and so on. So, given that, although the current trends are benign, we looked at our portfolio and decided to add to our contingency buffer to strengthen the balance sheet"

Guidance & Commitments

Key Metrics