IBN - ICICI Bank: Still Neutral

2023-08-14 15:14:06 ET

Summary

• I like ICICI Bank Limited's optimal loan mix which supports its net interest margins, and I am positive on the popularity of ICICI Bank's mobile banking application, iMobile Pay.
• On the flip side, ICICI Bank's earnings growth could potentially be slower in the coming years, and there is an absence of portfolio restructuring catalysts.
• I am sticking to my Neutral view and Hold rating for ICICI Bank.

Elevator Pitch

I rate ICICI Bank Limited ( IBN ) shares as a Hold. I am disappointed with IBN's stance on asset monetization and the company's operating expense outlook. However, I have a favorable opinion of ICICI Bank's loan mix, and I am encouraged that the bank has continued to make headway in the area of digitalization as evidenced by the popularity of its mobile banking application. My investment view of ICICI Bank is Neutral, which translates into a Hold rating, as I don't see any compelling reasons to be strongly bullish or bearish on the name.

Asset Monetization

In my prior March 21, 2023 write-up for ICICI Bank, I had highlighted that there is an opportunity for IBN to enhance shareholder value by monetizing the company's 48% stake in its insurance business arm, ICICI Lombard [ICICIGI:IN].

But ICICI Bank's management commentary and recent news flow indicate that there is a reasonably small chance of IBN monetizing its equity interest in ICICI Lombard and its other non-core businesses such as ICICI Securities [ISEC:IN].

At its Q1 FY 2024 (YE March 31) earnings call in late July this year, IBN noted that it had made an application to the relevant regulatory authorities to increase its stake in ICICI Lombard from 48% now to above 50% in the future.

Separately, ICICI Bank had earlier proposed in June of the current year to buy the remaining 25% equity interest in its brokerage business, ICICI Securities, to make it a 100%-owned subsidiary of the company.

Prior to the recent developments, investors have been hoping that IBN could potentially divest its non-core or non-banking businesses and assets. As it stands now, ICICI Bank's shares seem unlikely to benefit from any potential re-rating catalysts relating to portfolio restructuring.

Operating Costs

IBN's operating expenses increased by a meaningful +25.9% YoY from INR75.7 billion in the first quarter of fiscal 2023 to INR95.2 billion for the most recent quarter as indicated in the company's Q1 FY 2024 earnings presentation . Specifically, ICICI Bank's staff costs rose by +36.3% YoY from INR28.5 billion to INR38.8 billion during the same time frame.

Going forward, ICICI Bank's operating costs, and in particular, its employee expenses, are most likely to be higher.

ICICI Bank stressed at the company's recent first quarter results briefing that "there is a lot of opportunity for us to grow our franchise, and we would continue to invest in that." Furthermore, IBN also emphasized that "we do expect to continue to hire" as per "our business plans."

Based on S&P Capital IQ's consensus data, IBN's normalized EPS growth in local currency or INR terms is projected to moderate from +32.1% for FY 2022 and +35.0% for FY 2023 to +14.2%, +12.2%, and +13.3% for FY 2024, FY 2025, and FY 2026, respectively. In my opinion, the market's consensus financial forecasts are consistent with ICICI Bank's management comments on investments, as IBN's bottom line growth is expected to slow as a result of rising operating costs.

Loan Mix

While I have an unfavorable view of ICICI Bank's stance on asset monetization and the company's operating cost outlook, I am impressed with IBN's optimal loan mix which will be supportive of the bank's future net interest margins.

There are expectations of net interest margin contraction for India's banking sector for the new fiscal year. Indian banks' average net interest margin is projected to decrease by between 0.1 percentage point and 0.2 percentage points in FY 2024, according to Indian credit ratings agency CRISIL Ratings' estimates .

I am of the opinion that ICICI Bank's net interest margin performance will be superior to most of its Indian banking peers, because of the company's favorable loan mix.

In its Q1 FY 2024 results presentation slides, IBN highlighted that a reasonably high proportion or 31% of the bank's domestic loans as of June 30, 2023, are on fixed-rate terms. This means if interest rates in India do come down as expected, close to a third of ICICI Bank's domestic loans will be unaffected as they aren't on floating-rate terms.

Also, ICICI Bank has been growing its unsecured loan book in the recent quarter, which have the potential to be repriced higher in the future. At IBN's most recent quarterly results call, it was mentioned that "unsecured has grown much faster than secured" on a QoQ basis in Q1 FY 2024, and the company acknowledged that "the rates (for its unsecured loans) are at probably (at a) pretty low level."

Mobile Banking Application

I have previously noted in my earlier January 6, 2023, update for IBN that "ICICI Bank's progress in the area of digitalization is commendable" based on takeaways from its 2022 Analyst Day . ICICI Bank's recently disclosed operating numbers suggest that the company has continued to achieve success with its digitalization plans.

The company's mobile banking application, known as iMobile Pay, has already reached a new milestone of having in excess of "10 million activations" by "non-ICICI Bank account holders" as of June 30 this year, as per IBN's management commentary at its Q1 FY 2024 earnings briefing. This implies ICICI Bank has managed to attract a significant number of new users outside the company's banking business client base.

iMobile Pay currently offers more than 400 services, and the mobile application's wide range of services makes it attractive for both ICICI banking clients and non-ICICI banking customers. In its first quarter earnings presentation, ICICI Bank highlighted a new service rolled out within the iMobile Pay app, referred to as ATW (Around The World), which "enables users to book global events, travel, tours" and pay "in Indian rupees."

Closing Thoughts

It is hard to label ICICI Bank as either a clear Buy or an outright sell, which explains why I have assigned a Hold rating to the stock. IBN's loan mix is favorable and the company's mobile banking application has been successful in gaining new users. However, there is a lack of asset monetization catalysts for ICICI Bank Limited, and IBN's earnings growth is expected to slow going forward due to elevated operating costs.

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