VasukiRao
Elevator Pitch
My rating for ICICI Bank Limited (IBN) is a Hold. I previously evaluated IBN’s financial performance for the second quarter of fiscal 2024 (YE March 31) with my earlier write-up published on October 24, 2023.
I assess the Indian banking industry’s latest data and ICICI Bank’s prospects in this article. My analysis suggests that IBN can achieve solid loan growth for the near future, but the bank’s net interest margin might possibly compress as a result of deposit competition. Also, I deem ICICI Bank to be valued by the market at close to fair value based on a study of the bank’s historical P/B valuations and ROA metrics. Therefore, I have decided to maintain my Hold rating for ICICI Bank.
India’s Key Banking Sector Data
Indian banks’ prospects appear to be mixed, taking into account the key metrics for the industry that were disclosed recently.
According to Reserve Bank of India’s (India’s central bank) most recent monthly statistics relating to deployment of bank credit released on December 29, 2023, there has been an acceleration in India’s banking system credit growth. In specific terms, bank credit growth for India improved from +15.3% YoY in October 2023 to +16.3% YoY for November 2023 (latest monthly numbers available). The latest monthly bank credit growth numbers provide support for the market’s expectations of robust loan growth at the teens percentage level for Indian banks in the future. Jefferies (JEF) and Indian credit ratings agency ICRA are projecting system credit growth rates of +15% and +12%-13% for India in calendar year 2024 and fiscal 2025 (April 1, 2024 to March 31, 2025), respectively.
On the flip side, Indian credit ratings agency CARE Ratings issued a report on January 2 this year which indicated the Indian banking sector’s loan-to-deposit ratio (adjusted for HDFC Ltd-HDFC Bank (HDB) merger) was as high as 77.4% as of mid-December last year. In contrast, the industry’s loan-to-deposit ratio was much lower, at 75.8% a year ago and 69.6% in September 2021. It is reasonable to assume that Indian bank’s competition for deposits remains stiff, considering the high loan-to-deposit ratio.
To sum things up, the latest banking industry metrics for India seem to indicate that Indian banks’ loan growth outlook is decent, but their net interest margins could potentially be impacted by deposit competition.
ICICI Bank’s Financial Prospects
The mixed outlook for India’s banking sector is also reflected in the internal credit growth targets and the sell-side consensus financial forecasts for IBN.
An article published in Indian media publication Financial Express on November 14, 2023 (following Indian banks’ latest quarter results releases in October last year highlighted that ICICI Bank was among India’s major banks which were “confident of growing their corporate loan book in double digits” for 2H FY 2024 (October 1, 2023 to March 31, 2024) based on interviews with “senior bankers.”
A key positive factor supporting the resilience of ICICI Bank’s future credit growth is that IBN has “a very minimal presence in the smaller ticket size segment” as disclosed at the company’s Q2 FY 2024 results call. In the Reserve Bank of India’s December 2023 Financial Stability Report, the central bank highlighted that there is a “build-up of stress” associated with “rising unsecured loans and rapid growth in consumer credit.” In other words, there is less downside for IBN’s loan growth prospects, as ICICI Bank’s exposure to “smaller ticket size” personal loans is limited.
On the other hand, the market sees ICICI Bank’s net interest margin contracting from 4.48% for FY 2023 to 4.20% and 4.10% in FY 2024 and FY 2025, respectively, based on consensus data sourced from S&P Capital IQ.
The sell-side analysts’ expectations regarding IBN’s net interest margin outlook are largely aligned with the management’s commentary. At its Q2 FY 2024 results briefing, ICICI Bank noted that it is likely that the bank will witness “some increase in the cost of deposits” and “some moderation in (net interest) margins over the next quarter or so.”
Return On Assets And P/B Valuation Metrics
Notwithstanding expectations of reasonably good loan growth, ICICI Bank’s net interest margin is likely to decline going forward, as mentioned in the preceding section. This also implies that it is highly probable that IBN’s Return on Assets or ROA is going to be lower in the coming years.
As per S&P Capital IQ’s consensus data, the analysts estimate that ICICI Bank’s ROA will reach a peak of 2.25% in FY 2024, prior to decreasing to 2.13% and 2.08% for FY 2025 and FY 2026, respectively.
ICICI Bank trades at a trailing P/B ratio of 2.98 times (source: S&P Capital IQ) now, which is just -14% below its 10-year P/B peak multiple of 3.46 times.
When IBN delivered a ROA of slightly below 2% (1.86% to be exact) in FY 2015 (April 1, 2014 to March 31, 2015), the bank was trading in the 2.2-2.7 times P/B range (source: S&P Capital IQ). In that sense, a ROA of 2% seems to justify a P/B ratio of above 2.7 times, or somewhere between 2.8 times and 3.0 times. Assuming that the market is pricing in expectations that ICICI Bank’s ROA eventually declines closer to 2% in the next few years, IBN’s current P/B multiple of 2.98 times appears to be fair.
Closing Thoughts
My decision is to retain a Hold rating for IBN after reviewing key industry figures and company-specific metrics. ICICI Bank’s prospects are mixed and the stock’s valuations are fair at best, so a Hold rating for the stock is warranted.
