Targets indicate more upside for ICICI Bank; growth triggers remain

ICICI Bank beat street expectations in the fourth quarter of the financial year 2022-23 (Q4FY23). The profit after tax (PAT) was at Rs 9,100 crore with net interest income (NII) at Rs 17,700 crore, and net interest margin (NIM) at 4.9 per cent - which was up 25 basis points up QoQ. Fee income (ex-treasury gain) increased 10.6 per cent YoY to Rs 4,800 crore. The treasury loss was at Rs 40 crore versus gain of Rs 36 crore in Q3.

The stock has responded positively. Analysts have a positive outlook as well, with valuations ranging from Rs 1,070, through a cluster of valuations at Rs 1,140, Rs 1,150 and Rs 1,155, and some optimistic valuations topping out at Rs 1,250. The subsidiary holdings alone should be worth Rs 100-plus. There appears to be a comfortable upside from current levels of Rs 905.

Management guidance is that there are strong growth opportunities in retail, small and medium enterprises (SME), and business banking plus some corporate sectors. The NIM has probably peaked and may moderate from here. The yield expansion is partially attributable to growth in high yielding unsecured products like personal loans, credit cards and business banking and faster re-pricing of the loan book to higher interest rates compared to a lag in re-pricing of liabilities (rates paid on deposits).  The bank has received an extension of 18 months till 24 September to increase the stake in insurance companies and management has indicated that there is sufficient time available to consider increasing stake in its insurance subsidiaries.

Core operating profit increased 36.4 per cent YoY to Rs 13,900 crore, and provisions declined to Rs 1,620 crore (roughly credit cost of 0.6 per cent, a decline of 30 basis points QoQ). Contingent provisions increased to Rs 13,100 crore (1.18 per cent of gross cash accruals). The total outstanding restructured loans declined to Rs 4,500 crore. The bank carries a restructured loan provision of Rs 1,400 crore (31 per cent of standard restructured assets).

The gross non-performing assets (NPA) to net NPA ratios declined 26 basis points and 7 basis points quarter on quarter (QoQ) respectively to 2.81 per cent and 0.48 per cent. The total stressed assets is 3.91 per cent versus 4.36 per cent in Q3.  The maximum single borrower outstanding to an account rated BB & below is less than Rs 500 crore. The bank has a total provision pool of 4.39 per cent which is an excess provision.

The bank’s operating expenses was up 27 per cent YoY at Rs 8,900 crore and employee cost increased by 40 per cent YoY, which was due to a one-off charge of employee cost of Rs 335 crore towards retirement benefit. The total technology spend was 9.3 per cent of total operating expenditure in FY23 compared to 8.6 per cent in the previous financial year. ICICI Bank added 480 branches in FY23, out of which 180 were added in Q4. The management intends to maintain this pace.