VasukiRao
Elevator Pitch
My score for ICICI Financial institution Restricted (IBN) is a Maintain. I beforehand evaluated IBN’s monetary efficiency for the second quarter of fiscal 2024 (YE March 31) with my earlier write-up revealed on October 24, 2023.
I assess the Indian banking business’s newest information and ICICI Financial institution’s prospects on this article. My evaluation means that IBN can obtain strong mortgage progress for the close to future, however the financial institution’s web curiosity margin may probably compress because of deposit competitors. Additionally, I deem ICICI Financial institution to be valued by the market at near truthful worth primarily based on a research of the financial institution’s historic P/B valuations and ROA metrics. Due to this fact, I’ve determined to keep up my Maintain score for ICICI Financial institution.
India’s Key Banking Sector Information
Indian banks’ prospects seem like blended, making an allowance for the important thing metrics for the business that have been disclosed just lately.
In response to Reserve Financial institution of India’s (India’s central financial institution) most up-to-date month-to-month statistics regarding deployment of financial institution credit score launched on December 29, 2023, there was an acceleration in India’s banking system credit score progress. In particular phrases, financial institution credit score progress for India improved from +15.3% YoY in October 2023 to +16.3% YoY for November 2023 (newest month-to-month numbers out there). The most recent month-to-month financial institution credit score progress numbers present assist for the market’s expectations of strong mortgage progress on the teenagers share stage for Indian banks sooner or later. Jefferies (JEF) and Indian credit score scores company ICRA are projecting system credit score progress charges of +15% and +12%-13% for India in calendar yr 2024 and financial 2025 (April 1, 2024 to March 31, 2025), respectively.
On the flip facet, Indian credit score scores company CARE Rankings issued a report on January 2 this yr which indicated the Indian banking sector’s loan-to-deposit ratio (adjusted for HDFC Ltd-HDFC Financial institution (HDB) merger) was as excessive as 77.4% as of mid-December final yr. In distinction, the business’s loan-to-deposit ratio was a lot decrease, at 75.8% a yr in the past and 69.6% in September 2021. It’s cheap to imagine that Indian financial institution’s competitors for deposits stays stiff, contemplating the excessive loan-to-deposit ratio.
To sum issues up, the most recent banking business metrics for India appear to point that Indian banks’ mortgage progress outlook is first rate, however their web curiosity margins may probably be impacted by deposit competitors.
ICICI Financial institution’s Monetary Prospects
The blended outlook for India’s banking sector can also be mirrored within the inner credit score progress targets and the sell-side consensus monetary forecasts for IBN.
An article revealed in Indian media publication Monetary Categorical on November 14, 2023 (following Indian banks’ newest quarter outcomes releases in October final yr highlighted that ICICI Financial institution was amongst India’s main banks which have been “confident of growing their corporate loan book in double digits” for 2H FY 2024 (October 1, 2023 to March 31, 2024) primarily based on interviews with “senior bankers.”
A key optimistic issue supporting the resilience of ICICI Financial institution’s future credit score progress is that IBN has “a very minimal presence in the smaller ticket size segment” as disclosed on the firm’s Q2 FY 2024 results call. Within the Reserve Financial institution of India’s December 2023 Financial Stability Report, the central financial institution highlighted that there’s a “build-up of stress” related to “rising unsecured loans and rapid growth in consumer credit.” In different phrases, there may be much less draw back for IBN’s mortgage progress prospects, as ICICI Financial institution’s publicity to “smaller ticket size” private loans is restricted.
Alternatively, the market sees ICICI Financial institution’s web curiosity margin contracting from 4.48% for FY 2023 to 4.20% and 4.10% in FY 2024 and FY 2025, respectively, primarily based on consensus information sourced from S&P Capital IQ.
The sell-side analysts’ expectations concerning IBN’s web curiosity margin outlook are largely aligned with the administration’s commentary. At its Q2 FY 2024 outcomes briefing, ICICI Financial institution famous that it’s doubtless that the financial institution will witness “some increase in the cost of deposits” and “some moderation in (net interest) margins over the next quarter or so.”
Return On Property And P/B Valuation Metrics
However expectations of moderately good mortgage progress, ICICI Financial institution’s web curiosity margin is more likely to decline going ahead, as talked about within the previous part. This additionally implies that it’s extremely possible that IBN’s Return on Property or ROA goes to be decrease within the coming years.
As per S&P Capital IQ’s consensus information, the analysts estimate that ICICI Financial institution’s ROA will attain a peak of two.25% in FY 2024, previous to lowering to 2.13% and a couple of.08% for FY 2025 and FY 2026, respectively.
ICICI Financial institution trades at a trailing P/B ratio of two.98 occasions (supply: S&P Capital IQ) now, which is simply -14% under its 10-year P/B peak a number of of three.46 occasions.
When IBN delivered a ROA of barely under 2% (1.86% to be actual) in FY 2015 (April 1, 2014 to March 31, 2015), the financial institution was buying and selling within the 2.2-2.7 occasions P/B vary (supply: S&P Capital IQ). In that sense, a ROA of two% appears to justify a P/B ratio of above 2.7 occasions, or someplace between 2.8 occasions and three.0 occasions. Assuming that the market is pricing in expectations that ICICI Financial institution’s ROA ultimately declines nearer to 2% within the subsequent few years, IBN’s present P/B a number of of two.98 occasions seems to be truthful.
Closing Ideas
My determination is to retain a Maintain score for IBN after reviewing key business figures and company-specific metrics. ICICI Financial institution’s prospects are blended and the inventory’s valuations are truthful at greatest, so a Maintain score for the inventory is warranted.
