ICICI Bank Q4 Review: Reducing The Gap With HDFC Bank

ICICI Bank Ltd.'s strong quarterly earnings will help the private lender further reduce the valuation gap with market leader HDFC Bank Ltd., analysts said.

ICICI Bank on Saturday reported that its net profit for the quarter ended March 31 stood at Rs 7,019 crore, up 59% year-on-year. That was higher than Rs 6,402.5 crore estimated by analysts tracked by Bloomberg. Net interest income for the quarter rose 21% year-on-year to Rs 12,605 crore.

The bank also saw its net interest margin rise to an all-time high of 4% —now comparable to HDFC Bank's.

While gross bad loan additions were slightly elevated on a sequential basis, better upgrades and recoveries ensured that the final figure was lower. Gross non-performing asset ratio for the bank improved by 53 basis points quarter-on-quarter to 3.6%.

With nearly every metric showing sustained improvement, analysts expect ICICI Bank's return on equity and return on asset ratios to improve over the next two years, improving its valuations.

Here's what the analysts said about ICICI Bank's Q4 results:

Macquarie Research

• ICICI Bank has managed to keep net interest margins at high level so 4% despite having 34% of the overall loan portfolio in mortgages, which is commendable.

• Close to 40% of the loan book is linked to repo-rate linked loans and hence any rate hike could further be accretive to margins.

• Even in the past, the bank has undergone management changes seamlessly and it has sufficient depth in management.

• Anup Bagchi is now being groomed possibly as the next CEO of the bank eventually looking at the diverse responsibilities that he is assuming.

• ICICI Bank trades at a core price to book value of 2.3x FY23E, which is cheap for its return on assets of 1.8%.

• Maintain outperform, with target price of Rs 1,000, implying a potential upside of 31% from the last close.

Motilal Oswal

• A stable mix of a high-yielding portfolio and a low-cost liability franchise is fueling steady NII growth.

• Net slippages improved sequentially, leading to continued moderation in credit cost.

• The additional Covid-19 provision buffer of 90 basis points of outstanding loans renders comfort.

• Expect the bank to deliver a return on asset ratio of 1.9% and return on equity of 16.3% in FY24.

• ICICI Bank remains top pick of the sector. Maintain buy with a target price of Rs 1,050 per share, up 38% from Friday's close.

Prabhudas Liladher

• The bank has consistently outperformed with earnings quality improving each quarter.

• Retail growth was primarily led by mortgages, personal loans and credit cards owing to opportunities available in micro markets and easier customer on-boarding.

• Growth in small and medium enterprises business was largely driven by decongested processes.

• Management has guided toward focusing on risk-calibrated growth in the future, with accretion in micro-markets which continue to be underpenetrated.

• Restructured pool declined sequentially by 119 basis points to 96 basis points of outstanding loans, with provision coverage of 31%.

• BB & below rated book further declined from 1.5% to 1.3% of the book, on a quarter-on-quarter basis.

• Envisage return on equity ratio of 15.6% for FY24, as compared with 16.8% for HDFC Bank.

Emkay Global

• ICICI Bank, trading at 1.8x FY24 adjusted book value, has narrowed the valuation gap with close peer HDFC Bank at a faster-than-expected pace due to the former’s strong core performance.

• Valuation gap has further room for reduction, as ICICI Bank's management premium is yet to play out, while HDFC Bank may struggle to reclaim the management premium it had in the past.

• Asset quality continues to trend well, while the bank carries a strong specific provision coverage of 79.5% and a contingent buffer of 0.8% of loans, which should support profitability, going forward.

• Business head rejig is a minor irritant as retail head Anup Bagchi will move to heading wholesale business.

• Given top management’s approach to provide all-around exposure to managers, hope for minimal near-term disruption with retail growth largely being self-sustaining now.

• Retain 'buy' with target price of Rs 1,025 per share, up 34% from the last close.

Systematix Institutional Equities

• ICICI Bank has never witnessed such a strong reduction in bad loan figures in the last 15 years.

• Net reduction in stressed asset portfolio stood at Rs 2,940 crore during the quarter, compared with Rs 1,060 crore in the December quarter.

• The bank’s management indicated that this occurrence of a large pre-payment should not be extrapolated.

• The bank's balance sheet is in a reasonably strong position with 79% provision cover, common equity Tier-1 capital at 17.6% and contingent provision at 87 basis points of loans.

• Estimate that the bank’s margin would expand further in FY23 and FY24 and return on equity would improve to 16% in FY24, from 15.4% in FY22.

• Reiterate 'buy' with a target price of Rs 960 per share, up 26% from the last close.