ICICI Bank best placed to face NIM shock; analysts see up to 44% upside

ICICI Bank Q3 result review: ICICI Bank, on Saturday, reported a beat on profitability at Rs 8,312 crore, led by strong growth, superior margin delivery, and contained operating expenditure

ICICI Bank Q3 review: Brokerages have applauded private lender ICICI Bank's 'super normal' performance in the October-December quarter (Q3) of financial year 2022-23 (FY23), reiterating that the bank is best placed among large private peers to deliver growth, and absorb any macro/asset-quality shocks given healthy provisions and capital buffers.

According to analysts led by M.B Mahesh at Kotak Institutional Equities, ICICI Bank would be able to demonstrate strength over its peers given diversified and granular loan book may withstand a slowdown against adverse credit costs, and emphasis in building better customer experiences would aid in building better liability and low-risk asset-side relationship.

"We maintain BUY with an unchanged fair value at Rs 1,070 as the stock remains our top pick. We value the bank at 2.7X book, and 18X December 2024E EPS for return on equity (RoEs) comfortable at 15 per cent levels. We believe that ICICI Bank would be able to demonstrate its strength as compared to its peers, and the performance thus far shows that the bank can consistently trade at best-in-class multiples," analysts at the brokerage said.

ICICI Bank, on Saturday, reported a beat on profitability at Rs 8,312 crore, as against Bloomberg’s estimate of Rs 8,242 crore, led by strong growth, superior margin delivery, and contained operating expenditure.

Unlike other banks, ICICI Bank built a contingent buffer of Rs 1,500 crore in Q3, taking it to Rs 11,500 crore/1.1 per cent of loans.

Its net interest income surged 34.6 per cent on-year to Rs 16,464.98 crore. The bank’s net interest margin (NIM) was at 4.65 per cent, sharply up from 3.96 per cent a year ago, and higher than 4.31 per cent in July-September quarter.

On the bourses, shares of ICICI Bank advanced 1.5 per cent in the intra-day trade, but settled flat at Rs 870 on the BSE. By comparison, the benchmark S&P BSE Sensex index added 0.5 per cent.

"Credit growth moderated a bit as the overseas book declined, but remained healthy at 20 per cent YoY/4 per cent QoQ. However, deposit growth lagged at 10 per cent YoY, leading to higher loan-to-deposit ratio (LDR). This, coupled with asset re-pricing and favourable loan composition, boosted margins to an all-time high of 4.65 per cent. We believe margins have peaked, and should ease a bit as funding cost catches up," pointed out Heet Khimawat of Emkay Global in a co-authored note with Dixit Sankharva and Soumya Jain.

Analysts opine that NIM will decline with a lag to the sector as ICICI re-prices external benchmark-linked lending rate (EBLR) loans at T+90. However, with a high base of NIM and provisions, and a strong retail franchise, ICICI Bank may be better equipped, versus peers, to navigate FY24 even when the Reserve Bank of India (RBI) stops rate hikes, they said.

Earnings outlook

Analysts at JM Financial are baking in 2.1 per cent growth in return on assets (RoAs), and 17.9 per cent growth in RoE by FY25 with strong core performance, industry-leading growth, and steady asset quality.

Those at HDFC Securities have raised NII growth projections in the range of 2.6 per cent to 5.8 per cent over FY23-25, and between 2 per cent and 5.4 per cent for PAT during the same period, given the lender accelerates its efforts at gaining market share through continued investments in new avenues, and further leveraging ecosystem banking (wholesale banking) and new-to-bank (NTB) customer funnels (retail banking).

"We remain constructive on ICICI Bank for its ability to optimally invest in building new growth runways. However, incrementally enhancing the medium-term return ratios appears a steep ask. The bank is currently witnessing a profitability overshoot, which is difficult to sustain. With deposit mobilisation lagging loan growth and timing differences in repricing, we believe that peak NIMs are now behind (expecting moderation in FY24E)," they cautioned.

JPMorgan projects earnings per share (EPS) improvement of 19-20 per cent over the next two financial years.