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Despite slightly higher-than-expected margin contraction by 25bps QoQ, ICICIB reported 5% earnings beat at Rs103bn/up 36% YoY (2.4% RoA), led by systembeating credit growth @18% YoY and lower provisions, as the bank has paused shoring up its already-high contingent buffer (1.2% of loans). We expect margin normalization to continue for most banks and so also for ICICIB mainly due to some moderation in unsecured loan growth amid rising stress/RBI’s rebuke and continued funding cost catch-up. However, the bank’s strong provisioning buffer should keep LLP lower and, thus, support its superior RoA of 2.1-2.4%/RoE of 17-19% over FY24- 26E. We believe the recent stock under-performance has been mainly due to the senior mgmt.’s attrition/rejig dwarfing its otherwise strong financial performance. However, we take comfort from the strong leadership back-up at ICICIB and are hopeful the bank remains adaptive to limit the unwarranted attrition, as it aspires to build up into a “sustainable & profitable bank” in the long run. We retain BUY with a revised TP of Rs1,375 (earlier Rs1,330), rolling fwd. the core bank’s valuation at 3x Sep-25E ABV (premium over HDFCB) and subsidiaries at Rs170/share.

Strong growth, but margin normalization continues amid rising CoF

ICICIB continues to outpace systemic credit growth at 18% YoY/5% QoQ and so also its largest private peer – HDFCB. Retail growth remained healthy at 22% YoY with most business segments contributing to growth and, thus, reducing dependence on unsecured loans for growth. SME growth also continued to fire up at a strong pace – up 29% YoY, which the bank has identified as a new growth engine and margin protector. Deposit growth also accelerated for the second quarter in a row at 19% YoY/5% QoQ, taking out investor concerns, though it comes with CASA ratio contracting to a low of 41%. This coupled with rising funding costs led to a 25bps margin contraction in 2Q to 4.5% (still 22bps higher YoY). We believe margins would continue to normalize due to some moderation in unsecured loans and cost catch-up.

Strong provision buffers should protect from any stress in unsecured loans/RBI action

Gross slippages moderated QoQ to Rs47bn/2% of loans due to moderation in retail/rural NPAs, which coupled with higher recovery/w-off led to a sharp reduction in the GNPA ratio by 28bps QoQ to 2.5%. The restructured loan book also reduced to Rs35bn/0.3% of loans, on which the bank carries 31% PCR. The FB/NFB exposure rated below BB to corporates/SME increased after long to Rs48bn/0.4% of loans in Q2FY24 from Rs43bn/0.4% of loans in Q1FY24. The bank also remains vigilant on rising stress in smallvalue unsecured loans, where its exposure is negligible. Specific PCR remains best among peers at 83% and, thus, leads to a lower NNPA ratio at 0.4% of loans. The bank has paused creating contingent provision buffer, which now stands at Rs131bn/1.2% of loans/Rs19 per share, again the highest among peer banks.

Retain BUY on ICICIB, our preferred pick

We have slightly tweaked our earnings estimates for FY24-26E by 2%, while we expect the bank to deliver superior higher RoA at 2.1-2.4%/RoE at 17-19% over FY24-26E. Notwithstanding recent underperformance, ICICIB remains our top pick in the banking space, given its superior returns profile, top-management credibility and strong capital/provision buffers amid rising stress noise. We retain BUY with a revised TP of Rs1,375/share (earlier Rs1330/share), valuing the bank at 3x Sep-25E ABV (assigning a slight premium over HDFCB) and subsidiaries at Rs170/share. Key risks: Higher middle/senior management attrition leading to business dislocation and slower-thanexpected growth/margin trajectory, led by macro disruptions.

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