Q3FY24 Review: ICICI Bank: NIMs decline, but execution remains strong

23 Jan 2024 , 01:54 PM

ICICI’s Q3 PPOP was 3% ahead of consensus and in line with IIFLe. But, lower provisions (despite AIF provisions) drove 5-6% PAT beat. NIM declined 10 bps, as 7 bps asset yield expansion was offset by 18 bps of COF increase. Analysts of IIFL Capital Services expect NIM pressure for the next two quarters, due to higher residual deposit re-pricing and limited levers for yield expansion. Stressed loan ratio improved 16 bps QoQ, but slippages inched up seasonally in KCC portfolio. Analysts of IIFL Capital Services largely keep their FY25-26 est. unchanged, and raise TP to Rs1,150 as they roll forward to FY26. They believe that the bank is running out of levers, so as to sustain peak profitability and expect its RoA premium to narrow vs peers. Retain ADD. 

NIMs decline, pressure to persist:

Loan growth of 4% QoQ/18% YoY was broad based (save for corporate, which was flat QoQ). Personal loan growth eased (still stronger than peers), and it intends to slow down with higher rates and rationalised payouts. NIM declined 10bps QoQ, due to flattish yields (despite 4 bps interest on IT refund benefit) and 20 bps rise in the cost of deposits. Analysts of IIFL Capital Services expect NIM pressure to persist, due to higher residual deposit re-pricing and limited levers for yield expansion. 

Asset quality stable:

Gross slippages inched up to 2.1% (vs 1.8% in Q2), due to seasonally higher slippages in the KCC portfolio (Rs6.2bn). However, lumpy corporate upgrades led to 18 bps QoQ improvement in GNPA. Stressed loan ratio improved 16 bps QoQ to 3.5%. The bank provided Rs6.3bn for AIF investments, but higher recoveries drove lowerthan-expected credit cost of 0.37%. It continues to build higher risk on the balance sheet – share of BBB and below rated corporate loans increased by 3pp to 30% and unsecured loans by 3.5pp to 14% since FY22. 

Valuation premium to continue in near term: 

ICICI is trading at 2.3x FY25 core P/ABV for FY25-26 ROA/ROE of 2%/16%. Analysts of IIFL Capital Services forecast FY24 ROA of 2.3% — 20-40 bps higher than peers. However, they expect this gap to close to 10-20 bps over FY25-26E. Analysts of IIFL Capital Services see a better risk-reward elsewhere, and have an SOTP-based TP of Rs1,150, based on 2.3x FY26 P/ABV for the bank and subs at Rs170/share.