Buy ICICI Bank Ltd for the Target Rs.1,670 by Motilal Oswal Financial Services Ltd
Braving the headwinds!
Margins showed significant resilience; asset quality remains stable
* ICICI Bank’s results epitomize the saying, “When the going gets tough, the tough get going.” Over the past few years, irrespective of the sectoral challenges such as unsecured asset quality issues, systemic growth moderation, liability accretion or NIM headwinds, the bank has been able to deliver a stellar performance, beating Street expectations. During 1QFY26, the controlled NIM decline of 7bp (half of our estimate) was another solid beat in that series, compared to a double-digit contraction reported by many peers.
* The bank continues to focus on superior risk-adjusted returns, underpinned by prudent underwriting and strong credit discipline. 1Q PAT grew 15.5% YoY to INR127.6b (6% beat), aided by resilient margins, controlled opex and healthy treasury gains.
* NII rose 11% YoY/2% QoQ to INR216.3b (3% beat). NIM contracted by a marginal 7bp QoQ to 4.34%. Treasury gains stood at INR12.4b vs. INR2.4b in 4QFY25.
* Advances grew 11.5% YoY/1.7% QoQ, led by continued thrust in Business Banking (BB). Deposits were flat QoQ (up 12.8% YoY), while CASA mix stood at 41.2%. Average CASA ratio improved 30bp QoQ to 38.7%.
* Fresh slippages stood at INR62.5b (INR59.2b in 1QFY25, KCC slippages of INR7.67b this quarter). GNPA ratio was flat at 1.67%, while NNPA ratio inched up 2bp QoQ to 0.41%.
* We maintain our earnings estimates and expect FY27E RoA/RoE at 2.3%/17.3%. ICICIBC remains our preferred BUY in the sector with a revised TP of INR1,670 (2.7x FY27E ABV).
BB portfolio mix increases to 20% vs. 16% two years ago
* 1Q PAT grew 15.5% YoY/1.1% QoQ to INR127.7b (6% beat), aided by better NIMs, healthy other income and controlled opex.
* NII grew 11% YoY/2% QoQ to INR216.3b (3% beat). NIMs contracted marginally by 7bp QoQ to 4.34% (adjusted for a change in the NIM calculation methodology to ‘no. of months’ from ‘no. of days’ in 4Q, decline was limited at 4-6bp). Other income grew by a healthy 17% QoQ to INR85b (5% beat), led by strong treasury gains and healthy fee income.
* Opex rose 8.2% YoY/5.6% QoQ to INR113.9b (in line). C/I ratio thus declined to 37.8% (down 12bp QoQ). PPoP grew 17% YoY to INR187.5b (6% beat).
* On the business front, advances grew by 11.5% YoY/1.7% QoQ, led by faster growth in the BB segment at 29.7% YoY/3.7% QoQ, which now accounts for 20% of the book.
? Deposits stood flat QoQ (up 12.8% YoY). CASA ratio declined 63bp QoQ to 41.2%; however, average CASA mix improved 30bp QoQ to 38.7%.
* Fresh slippages came in at INR62.5b (INR59.2b in 1QFY25, KCC slippages of INR7.67b this quarter). GNPA ratio was flat at 1.67%, while NNPA ratio inched up 2bp QoQ to 0.41%. PCR declined by 101bp QoQ to 75.9%, while the contingency buffer was unchanged at INR131b (1.0% of loans).
Highlights from the management commentary
* NIMs are expected to remain under pressure in 2Q due to cumulative repo rate cuts by the RBI. Margins in 3Q/4Q should show less volatility due to the revised methodology for NIM reporting (from number of days to number of months).
* NIM impact in 4QFY25 and 1QFY26 would have been only 4-6bp QoQ on a liketo-like basis.
* In PL and CC, the bank is confident about the quality of new originations and expects a pick-up in volumes. CC growth is expected to accelerate in the coming quarters.
* Wholesale deposit rates were higher than retail TD rates, and the bank’s decision to reduce its wholesale deposit book contributed to a decline in CoF.
Valuation and view
ICICIBC reported another strong performance in the challenging environment, driven by healthy NIMs, other income, contained opex and in-line provisions. The continued improvement in asset mix limited NIM compression, though the bank indicated further pressure on margins in 2Q as repricing happens fully. The bank’s investment in technology has resulted in consistent productivity gains and steady improvement in cost ratios. Asset quality remains under control, while the bank continues to carry a contingency provisioning buffer of INR131b (1.0% of loans). We maintain our earnings estimates and expect FY27E RoA/RoE of 2.3%/17.3%. ICICIBC remains our preferred BUY in the sector with a revised TP of INR1,670 (2.7x FY27E ABV).
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