IBN - ICICI Bank: Earnings Beat Overshadowed By NIM Contraction And Competition

2023-10-24 10:09:58 ET

Summary

• ICICI Bank's bottom line expanded by +36% YoY in Q2 FY 2024, and this was +9% above market expectations.
• But ICICI Bank's outlook isn't that favorable, considering expectations of continued net interest margin compression, and competitive risks.
• My Hold rating for IBN stock remains intact, taking into account both its second quarter performance and its near-term prospects.

Elevator Pitch

I have a Hold investment rating for ICICI Bank Limited ( IBN ) stock.

Earlier, I wrote about ICICI Bank's loan mix, operating costs, asset monetization strategy, and digitalization efforts in my August 14, 2023 article .

With this current update, my focus is on the review of IBN's most recent Q2 FY 2024 (July 1, 2023 to September 30, 2023) financial results announced on October 21, 2023.

I have a positive view of ICICI Bank's second quarter earnings beat supported by loan growth and lower credit costs. But I am concerned about competitive risks and the bank's below-expectations net interest margin. With these factors in mind, I leave my existing Hold rating for IBN unchanged.

Q2 FY 2024 Earnings Exceeded Expectations

Net income for ICICI Bank grew by +35.8% YoY and +6.4% QoQ to INR102.6 billion in the second quarter of fiscal 2024 (YE March 31). This translated into an impressive +9% earnings beat for IBN in the most recent quarter as per S&P Capital IQ's consensus data.

ICICI Bank's above-expectations second quarter bottom line was driven by both strong loan growth and a significant decline in provisions.

Total loans for IBN increased by +5.0% QoQ and +18.3% YoY to INR11,105.4 billion as of end-Q2 FY 2024. ICICI Bank highlighted at the company's recent second quarter results call (event transcript sourced from S&P Capital IQ ) that it has "pretty broad-based (loans) growth" and it is "not reliant on personal loans." As indicated in its Q2 earnings presentation slides , no single loan category or loan type accounted for over 10% of IBN's total loans as of September 30, 2023, with the exception of mortgages (32.7%) and business banking (22.0%). This implies that ICICI Bank's robust loan growth will most likely be sustainable in subsequent quarters.

ICICI Bank's provisions decreased by -64.6% YoY and -54.9% QoQ to INR5.8 billion for Q2 FY 2024. The bank's annualized credit cost ratio also declined from 0.71% for Q2 FY 2023 and 0.49% for Q1 FY 2024 to 0.21% in the most recent quarter. At its Q2 earnings briefing, IBN credited the substantial drop in provisions and improvement in the credit cost ratio to "corporate recoveries and upgrades." ICICI Bank also noted that "delinquencies" are "well within" expectations, which is validated by the -28 basis points QoQ decline in the NPL (Non Performing Loans) ratio from 2.76% in Q1 FY 2024 to 2.48% for Q2 FY 2024.

Net Interest Margin Contraction Was Worse Than Expected

IBN's net interest margin or NIM contraction in the most recent quarter was more severe than what the market had expected, and ICICI Bank's NIM might continue to be under pressure for the subsequent quarter.

ICICI Bank's NIM decreased by -25 basis points from 4.78% for Q1 FY 2024 to 4.53% in Q2 FY 2024. Prior to IBN's actual second quarter results announcement on October 21, the sell-side analysts had anticipated that ICICI Bank would record a NIM of 4.57% (source: S&P Capital IQ ) in the second quarter of this fiscal year.

The market is expecting ICICI Bank's NIM to contract further to 4.20% and 4.00% for the third and fourth quarters of fiscal 2024, respectively as per consensus financial projections taken from S&P Capital IQ . On a full-year basis, the current consensus forecasts point to IBN's NIM going down from 4.45% for FY 2023 to 4.20% and 4.10% in FY 2024 and FY 2025, respectively.

At its Q2 FY 2024 results briefing, IBN explained that its most recent quarterly NIM had been negatively affected by "the lagged impact of increase in term deposit rates." More significantly, ICICI Bank also guided that there will be "some increase in the cost of deposits on the book, and therefore, some moderation in (net interest) margins over the next quarter or so."

Competition Is A Major Concern

ICICI Bank's peers and competitors are becoming more aggressive, and this is something that investors will naturally be worried about.

As an example, HDFC Bank Limited ( HDB ) is sticking to "an aggressive branch expansion run-rate of 1,400-1,500 in 2023-24 that will see the network rising to 13,000-14,000" as indicated in The Telegraph's news article published last month. In contrast, ICICI Bank had opened around 350 new bank branches for 1H FY 2024, or an annualized new branch additions of approximately 700 which is just half of that for HDB.

Notably, IBN emphasized at its Q2 FY 2024 earnings call that it is "not really looking at what any other particular bank may or may not be doing" when it is considering its own branch expansion plans. On one hand, it is positive that ICICI Bank hasn't blindly responded to its rivals' moves at the expense of profitability and returns on investment. On the other hand, ICICI Bank might potentially cede market share to competitors, if it doesn't step up its pace of new branch openings.

Also, ICICI Bank's NIMs for the quarters ahead could be impacted by both deposit repricing (detailed in the prior section) and pricing competition. IBN acknowledged at the company's second quarter results briefing that "there is a reasonable level of competitive intensity across the system" with respect to "loan pricing." As such, it is reasonable to assume that IBN will have to offer more attractive rates on loans to remain competitive, which will be negative for its NIMs.

Concluding Thoughts

IBN's shares are still awarded a Hold rating. Even though ICICI Bank's most recent quarterly earnings surpassed expectations, the bank's outlook is murky taking into account the consensus net interest margin estimates and the competitive environment.

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