Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to Rs 10,000 crore infrastructure bonds of ICICI Bank Ltd (ICICI Bank). The ratings on existing reaffirmed debt instruments have been reaffirmed at ‘CRISIL AAA/CRISIL AA+/Stable’.

 

The ratings continue to reflect the bank’s healthy capitalisation, strong market position and comfortable resource profile. These strengths are partially offset by adequate asset quality. However, healthy capital position, along with demonstrated ability to raise capital, steady pre-provisioning profits and comfortable provision cover cushion the credit risk profile of the bank against asset quality risks.

 

In line with the relief measures announced by the Reserve Bank of India (RBI) during the Covid-19 pandemic, ICICI Bank had provided moratorium to its borrowers. Though collections declined during the initial months of the first wave, they improved subsequently. However, the second wave of the pandemic led to intermittent lockdowns and localised restrictions, which impacted collections once again. Although the impact was moderate during this phase, any adverse change in payment discipline of borrowers may lead to higher delinquencies.

 

Under the schemes announced by the RBI dated January 1, 2019, February 11, 2020, August 6, 2020, May 5, 2021, and the resolution framework for stressed accounts, ICICI Bank had restructured 1.3% of advances as on December 31, 2021. Nevertheless, the ability to manage collections and asset quality in this fiscal is a key monitorable. Over the medium term, the impact of third wave will be monitored.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of ICICI Bank and its subsidiaries because of majority shareholding, business and financial linkages and shared brand.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Healthy capitalisation

Networth was sizeable at Rs 163,069 crore, while Tier I capital adequacy ratio (CAR) was 16.93% and overall CAR 17.91% (under Basel III), as on December 31, 2021. This makes it one of the well-capitalised banks in India. In fiscal 2021, the bank raised equity capital of Rs 15,000 crore under QIP (qualified institutional placement) to further strengthen its capital position. Consequently, networth coverage for net NPAs (non-performing assets) improved to 22.2 times as on December 31, 2021, from 11.1 times as on December 31, 2019 (16.1 times as on March 31, 2021). Moreover, the bank has adequate flexibility to raise resources through sale of stake in subsidiaries (more than Rs 16,000 crore raised in the past few fiscals). Backed by healthy cash accrual and demonstrated ability to raise capital, the bank is likely to maintain healthy capitalisation to support overall credit risk profile and adequately cover for asset-side risks while pursuing credit growth over the medium term.

 

Strong market position

ICICI Bank is among the largest private sector banks in India with consolidated asset base of Rs 16.8 lakh crore as on December 31, 2021 (standalone asset base of Rs 13.5 lakh crore). With advances and deposits of Rs 8.1 lakh crore and Rs 10.2 lakh crore, respectively, as on December 31, 2021, it is also one of the three banks that has been classified as domestic systemically important banks (D-SIBs) by the RBI, highlighting its significance to the overall financial system. Experienced leadership and management has been instrumental in establishing strong market position for the bank and its subsidiaries. Size, scale and positioning are key strengths of the ICICI group in its various business segments. As a leading full-service universal banking group with pan-India footprint, the group has strong presence in life and general insurance, asset management, private equity and retail broking. Wide geographical spread is reflected in its network of 5,298 branches as on December 31, 2021. The bank is expected to continue its strategy of building upon its established market position in the domestic lending space, particularly in retail lending, while maintaining strong liability franchise. CRISIL Ratings will continue to monitor the developments in balance sheet growth, asset quality performance and management strength and suitably factor them in its ratings on an ongoing basis.

 

Comfortable resource profile

The resource profile is supported by high proportion of low-cost current account and savings account (CASA) deposits. These, as a proportion of total deposits, remain healthy at 47.2% as on December 31, 2021, while average CASA ratio was 44.9% during the third quarter of fiscal 2022. Furthermore, retail deposits form a significant part of the total deposits and provide stability to the resource profile. Wide branch network and strong focus on digital banking will help maintain higher-than-industry-average CASA levels and competitive funding cost over the medium term.

 

Weakness:

Adequate asset quality

Overall asset quality is adequate as reflected in overall gross NPAs (as a percentage of customer assets) at 4.1%[1] as on December 31, 2021. The same has improved from 5.0% as on March 31, 2021 and 5.5% as on March 31, 2020 (and a peak of 8.8% as on March 31, 2018). While delinquencies came largely from the corporate loan portfolio in the past, the retail and SME (small and medium enterprises) segments have witnessed higher delinquencies more recently on account of the impact of the pandemic. Gross NPAs (as a percentage of gross advances) in the retail and business banking segments were at 2.4% as on December 31, 2021, compared to 3.0% as on March 31, 2021, and 2.0% as on March 31, 2020.

 

Asset quality has been supported by various schemes launched by the Government of India and the RBI, such as the emergency credit line guarantee scheme that has benefitted the micro, small and medium enterprises. The one-time restructuring scheme has also benefitted the reported NPA metrics. ICICI Bank had restructured around 1.3% of advances as on December 31, 2021. Furthermore, it has taken several measures to address asset quality challenges and maintain the overall credit risk profile. The bank has demonstrated resilience in the past while tiding over asset quality pressures across cycles by putting in place an institutionalised risk assessment framework involving enhanced control and monitoring mechanisms.

 

Moreover, as part of the strategy, the bank has been steadily increasing the proportion of retail assets, which stood at ~62% of overall net advances as on December 31, 2021 (~57% as on March 31, 2018). This is expected to make the loan book granular and support asset quality.

 

Nevertheless, CRISIL Ratings will continue to monitor the traction in asset quality and its consequent impact on profitability on account of the challenging macroeconomic environment.

[1] Overall gross NPAs as a percentage of gross advances stood at 4.3% as on December 31, 2021 (5.3% as on March 31, 2021).

Liquidity : Superior

Liquidity remains supported by a strong retail deposit base that forms a significant part of the total deposits. As on December 31, 2021, liquidity coverage ratio was 126.2% (on consolidated basis). Liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the RBI, access to the call money market and the refinance limits from National Housing Bank and National Bank for Agriculture and Rural Development.

 

ESG profile

CRISIL Ratings believes that ICICI Bank’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator between individual banks. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 

ICICI Bank has an ongoing focus on strengthening various aspects of its ESG profile.

 

ICICI Bank’s key ESG highlights:

 

•      The bank actively finances projects for capacity creation in environment-friendly sectors like renewable energy and other sustainable sectors like waste processing and mass rapid transport. Further, as part of overall credit appraisal process, the bank analyses the environmental impact of a proposed project and assesses its social risks.

 

•      With 11.9 MWp renewable energy capacity, including contracted capacity through power purchase agreements, 30% of the energy requirement at the bank's three large offices were met through renewable energy in fiscal 2021.

 

•      The bank's philosophy of meritocracy and equal opportunity in its people decisions led to a large number of leadership positions being held by women over the past two decades. Of the total workforce, around 31.4% comprised of women as on March 31, 2021.

 

•      Majority of the board members are independent directors, none of the independent directors have tenure of more than 10 years and there is a segregation in chairperson and executive positions. The bank has a dedicated investor grievance redressal mechanism and the disclosures put out by it are extensive.

 

There is growing importance of ESG among investors and lenders. ICICI Bank’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook Stable

ICICI Bank will maintain its strong market position, healthy capitalisation and comfortable resource profile over the medium term.

Rating Sensitivity factors

Downward factors

• Significant deterioration in asset quality impacting earnings on sustained basis

• Decline in CARs (including capital conservation buffer [CCB]) with CET I (common equity tier I) remaining below 11% on sustained basis

About the Bank

Promoted by the erstwhile ICICI Ltd, ICICI Bank was incorporated in 1994. In 2002, ICICI Ltd was merged with ICICI Bank. In August 2010, ICICI Bank acquired Bank of Rajasthan, enhancing its presence in north and west India. The bank had consolidated asset base of Rs 16.8 lakh crore as on December 31, 2021, with advances of Rs 8.7 lakh crore. On standalone basis, asset base and advances were Rs 13.5 lakh crore and Rs 8.1 lakh crore, respectively. The advances mix, as on December 31, 2021, consisted of 62% retail loans, 6% business banking, 5% SME loans, 23% domestic corporate and 5% overseas advances.

 

Standalone profit after tax (PAT) was Rs 16,193 crore in fiscal 2021, against Rs 7,931 crore in the previous fiscal. At the consolidated level (with subsidiaries and other associate entities), reported PAT was Rs 18,384 crore in fiscal 2021, against Rs 9,566 crore previous fiscal.

 

For the nine months ended December 31, 2021, ICICI Bank reported standalone PAT of Rs 16,321 crore, against Rs 11,790 crore in the corresponding period of the previous fiscal. At consolidated level (with subsidiaries and other associate entities), the bank reported PAT of Rs 17,391 crore for the nine months ended December 31, 2021, against Rs 13,498 crore in the corresponding period previous fiscal.

Key Financial Indicators : (consolidated)

As on / for nine months ended December 31	Unit	2021	2020
Total assets	Rs crore	1,682,904	1,519,353
Total income (net of interest expenses)	Rs crore	84,170	84,921
Profit after tax	Rs crore	17,391	13,498
Gross NPA*^	%	4.1	4.4
Overall capital adequacy ratio*	%	17.9	18.0
Return on assets (annualised)	%	1.4	1.2

* on a standalone basis for the bank

^as a % of customer assets

Any other information:

ICICI Bank, on standalone basis, reported annualised return on assets of 1.7% for the nine months ended December 31, 2021, against 1.4% in the corresponding period of the previous fiscal. Profitability was impacted in fiscal 2021 by additional pandemic-related provisions of Rs 7,475 crore (total Covid-related provisions stood at Rs 6,425 crore as on December 31, 2021). Profitability has improved in the fiscal 2022 with decrease in credit cost. Provision coverage ratio (excluding technical write-offs) stood at 80% as on December 31, 2021 (78% as on March 31, 2021).

 

Annexure: Note on tier-I instruments (under Basel III)

The distinguishing features of non-equity tier I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment and principal write-down (on breach of a pre-specified trigger). These features increase the risk attributes of non-equity tier I instruments over those of tier II instruments under Basel III and capital instruments under Basel II. To factor in these risks, CRISIL Ratings notches down the ratings on these instruments from the bank's corporate credit rating. The rating on ICICI's tier I bonds (under Basel III) has, therefore, been lowered by one notch from its corporate credit rating to 'CRISIL AA+/Stable, in line with CRISIL Ratings’ criteria (refer to CRISIL Ratings’ rating criteria for Basel III compliant instruments of banks').

 

The factors that could trigger a default event for non-equity tier I capital instruments (under Basel III) resulting in non-payment of coupon are: i) the bank exercising coupon discretion; ii) inadequacy of eligible reserves to honour coupon payment if the bank reports losses or low profits; or iii) the bank breaching the minimum regulatory CET I (including CCB) ratio. Moreover, given the additional risk attributes, the rating transition for non-equity tier I capital instruments (under Basel III) can potentially be higher and faster than that for tier II instruments.

 

Key features of ICICI Bank's Rs 4,500 crore tier I bond issue (under Basel III) 

•      The bonds are non-convertible, perpetual, unsecured and Basel III-compliant.
•      Coupon payments shall be annual and non-cumulative.
•      The bank has full discretion at all times to cancel coupon payments.
•      The coupons must be paid out of distributable items. In this context, coupon may be paid out of current year profits. However, if current year profits are not sufficient, coupon may be paid subject to availability of sufficient eligible reserves (subject to the bank meeting minimum regulatory requirements for CET I, tier I, and total capital ratios at all times as prescribed by the RBI) or credit balance in profit and loss account, if any.
•      Dividend stopper clause as defined in the guidelines is applicable.
•      Loss-absorption features as per the RBI Basel III norms are applicable
  •      Instrument will be temporarily written down upon CET I breaching the pre-specified trigger of 5.5% before March 31, 2019, and 6.125% on or after March 31, 2019.
  •      The instrument may be permanently written off at the option of RBI on occurrence of point of non-viability (PONV) trigger. The PONV trigger shall be determined by the RBI.

Annexure - Details of Instrument(s)

ISIN	Instrument	Date of issue	Coupon rate (%)	Date of maturity	Issue size (Rs crore)	Complexity level	Outstanding rating with outlook
INE005A11309	Bonds*	05-Oct-98	Zero coupon	05-Dec-22	137.9	Simple	CRISIL AAA/Stable
INE005A11531	Bonds*	16-Jun-99	Zero coupon	16-Apr-23	18.3	Simple	CRISIL AAA/Stable
INE005A11341	Bonds*	01-Dec-98	Zero coupon	01-May-23	57.1	Simple	CRISIL AAA/Stable
INE005A11382	Bonds*	11-Jan-99	Zero coupon	11-Jun-23	40.2	Simple	CRISIL AAA/Stable
INE090A08SP8	Bonds*	22-Jan-98	Zero coupon	21-Jul-26	40.4	Simple	CRISIL AAA/Stable
INE090A08UC2	Tier I bonds (Basel III)	28-Dec-18	9.90	28-Dec-2117	1140	Highly complex	CRISIL AA+/Stable
NA	Tier I bonds (Basel III)#	NA	NA	NA	3360	Highly complex	CRISIL AA+/Stable
NA	Infrastructure bonds#	NA	NA	NA	10000	Simple	CRISIL AAA/Stable

*pertains to erstwhile debt instruments of ICICI Ltd transferred to ICICI Bank; these are deep discount bonds with amount outstanding as on November 30, 2016

#not yet issued