ICICI Bank shares hit a new high after a strong Q2 – here’s what the analysts are saying

• ICICI Bank is second largest by assets amongst the largest private lenders in the country, and it has reported a strong performance in Q2.
  
• The private sector lender reported net interest income of ₹14,787 crore at a 26.5% YoY surge, ahead of HDFC Bank’s 18.9% growth, and only slightly behind Axis Bank’s 31%.
  
• ICICI Bank also reported a 31% YoY surge in its net profit to ₹8,007 crore during the period.
  

ICICI Bank shares have hit a new 52-week high after the private lender delivered better-than-expected results with the healthy growth in net interest income (NII) and improvements in asset quality, while its slippages moderated during the quarter.

While ICICI Bank reported a 26.5% YoY increase in its NII to ₹14,787 crore, its peers HDFC Bank reported an 18.9% surge to ₹21,021 crore while Axis Bank reported a 31% increase to ₹10,360 crore during the period.

Over the last five days, shares of ICICI Bank have surged nearly 4%. That is half of the total gain over the last one month where the private lender’s share price increased 8%. It remains amongst the top three performers amongst large banks in 2022, only behind Axis Bank and the state-run SBI.

So why is the market so excited about ICICI Bank? According to analysts, the bank’s strong Q2 performance with broad-based business growth, meaning growth is not concentrated in one or two segments.

“Business growth remains strong and was broad-based, with an increase of 23% YoY and 5% QoQ, led by both the Retail and Corporate segments. The bank continues to invest in technology and digital initiatives to further boost the pace and sustain the momentum,” said a report by Motilal Oswal.

It's not just business growth that is a positive for ICICI Bank, according to analysts. The bank’s investments in technology have resulted in an increase in its operating expenses, but analysts and the bank believe the revenue growth provides enough headroom to do so.

According to analysts at Motilal Oswal, ICICI Bank’s tech and digital initiatives could aid in helping it further boost the pace of growth and sustain momentum.

ICICI Bank was also the mutual fund darling in September, with mutual fund holdings totalling to ₹1.44 lakh crore. This is after funds booked some profits by selling 1.23 crore shares of the lender.

Broad-based growth – improving metrics across the board, say analysts

While the topline and margin numbers show Q2 has been a good quarter for ICICI Bank, analysts say that metrics across the board have seen an improvement.

Here’s how the key metrics of ICICI Bank compare with those of HDFC Bank and Axis Bank:


Source: Company reports

“ICICI Bank reported a spectacular set of numbers with NIM for the quarter being highest in at least a decade and RoA for the quarter being the second highest since at least 2007. YoY credit growth is also the highest in at least 12 years,” said a report by Edelweiss.

The brokerage added that the bank’s asset quality has improved too, with slippages moderating sequentially.

Advances are likely to benefit too, say analysts, thanks to the bank’s focus on tech and digital initiatives. Overall, total advances surged 23% YoY, with retail, SME and business loan segments delivering growth between 23-27% during the period.

“We expect the bank to report consistent mid to high teens credit growth and project return on assets and return on equity of 2% and 16%, respectively, in FY24E,” the report added.

Rise in funding costs and elevated opex could dampen coming quarters

There are two areas investors will have to keep an eye on – funding costs, and operating expenditure.

ICICI Bank’s domestic loan book amounting to 44% is linked to repo rates – in a rising interest rate regime, while the lender was quicker to pass on the higher interest rates to its customers, it was relatively slower in hiking deposit rates. This has resulted in a 19 bps sequential increase in net interest margins to 4.76%.

“Funding cost may rise at a faster pace in coming quarters which may arrest the rate of NIM increase,” said a report by Prabhudas Lilladher.

Apart from this, ICICI Bank stated in its filing that operating expenses may remain elevated as the bank looks to use the revenue boost to invest in its business. While this augurs well for business growth according to analysts, investors will want to keep a track of it nonetheless.

The lender’s opex numbers were marginally higher than analyst expectations, at ₹8,160 crore – an increase of 24% YoY.

Here’s what analysts recommend:


Note: Upside compared to share price of ₹931 as at 3 p.m., October 25, 2022

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