ICICI Bank Ltd’s better-than-expected results for the three months ended June (Q1FY24), announced on Saturday, are likely to support the stock’s near-term show. Shares of the private sector lender hit a new 52-week high on Monday after its profit after tax for the quarter grew by 40% year-on-year (y-o-y) to nearly ₹9,650 crore. This was driven by 35% growth in core operating profit.
The bank’s deposit and credit (loans) grew by 18% each. The deposit performance was one of the key highlights of the quarter with growth being the highest in nine quarters. Growth was led by term deposits, as expected. Credit growth was driven by the retail segment including personal loans, credit cards, auto finance and SME segment. Strong credit growth gave a fillip to the bank’s net interest income.
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ICICI Bank’s management expects deposits would continue to reprice in coming quarters. Note that deposits rate repricing happens with a lag unlike loan rates transition which is faster. As deposits get repriced, cost of funds increases for banks. This, in turn, weighs on net interest margins (NIM).
ICICI Bank saw some pain on account of this in Q1 with its blended NIM falling 12 basis points (bps) seque-ntially to 4.78%. In Q1, the cost of funds rose to 4.6% from 4.29% in Q4FY23.
ICICI Bank’s management believes the cost of funds would continue to increase. “Going forward, management expects cost of deposits to continue to increase over the next couple of quarters (at 4.31% for Q1FY24, +33 bps quarter-on-quarter, 85 bps year-on-year) as deposit repricing plays out,” said analysts from JM Financial Institutional Securities Ltd. They added, “In our view, while this could lead to some margin compression from current elevated levels – ICICI Bank’s ability to manoeuvre NIMs in this transition is likely to be a key performance driver as we expect NII growth of 18% for FY24 (implying largely stable NIMs for FY24 versus FY23).” In FY23, ICICI Bank’s NIM stood at 4.48%.
To be sure, the NIM compression would be a common occurrence in FY24 across the industry as banks race to garner deposits to fund credit demand. For instance, Kotak Mahindra Bank Ltd, which also announced its Q1 results on Saturday, saw a NIM decline of 18 bps sequentially to 5.57%.
Nevertheless, with banks racing to mobilize deposits to fund their credit growth, the competition would be intense. ICICI Bank’s strong liability profile and asset mix are giving it an edge over peers, said analysts. One concern for investors, though, would be how operating expenditure (Opex) shapes up. In Q1, Opex remained high. Investments in staff and technology are expected to keep cost ratios elevated.
Thus, how return ratios pan out will be worth tracking. “Despite pressure on margin and higher operating expenses, strong asset quality should keep credit costs benign which could aid ICICI Bank in delivering RoA/RoE of 2-2.2%/17-18% over FY24-25,” said Dnyanada Vaidya, research analyst-BFSI, Axis Securities. Asset quality is expected to be stable.
Investors in ICICI Bank shares seem to be capturing the picture adequately. In the past one year, the stock has gained 24%, although meaningful upsides may be capped here. “After a strong outperformance backed by robust earnings growth (three-year CAGR of about 60%), we estimate earnings growth to moderate to an 18% CAGR over FY23-25, affected largely by a decline in margins and limited levers available on the opex/credit cost front,” said analysts from Motilal Oswal Financial Services in a report on 23 July. “We thus expect stock returns to be moderate for ICICI Bank and many other large-cap banking stocks,” they added.