ICICI Bank: The ‘All Weather’ Indian Bank (NYSE:IBN)

India’s second-largest diversified banking group, ICICI Bank (NYSE:IBN), has come a long way since its governance lapses under ex-CEO Chanda Kochhar. Current CEO Sandeep Bakshi has not only been scandal-free (so far) but has also checked all the right fundamental boxes. The bank’s most recent quarter was a case in point – in contrast with key peer HDFC Bank (HDB), which saw erosion on all sides of the P&L, ICICI Bank showed much better resilience and a clear path to defending its margins going forward. To be clear, the path ahead won’t be without speedbumps, as system liquidity, even after recent injections, remains very tight in India; as a result, competition for low-cost deposits will continue to be intense into the coming months.

In any case, ICICI Bank’s structurally low funding cost stands out and should help it underwrite continued credit and earnings growth through the cycles. It’s also worth keeping the big picture in mind; after all, the group operates in a country where low teens % nominal GDP growth is the norm, and as the latest monthly credit numbers show, there’s still more than enough lending appetite to go around.

The catch is that this isn’t a conventionally cheap banking stock at the current high-teens forward P/E (~3x book). The multiple is, however, below historical levels and more importantly, is backed by a sustained high teen % return on equity profile and 20-30% earnings growth runway. I don’t typically like owning banks heading into a rate cut cycle but given its best-in-class fundamentals, ICICI Bank is a rare exception.

Resilience Shining Through A Tough Backdrop

Unsurprisingly, ICICI Bank has been seeing some net interest margin (NIM) pressure in recent quarters. The latest print, for the third quarter of this fiscal year 2024, saw more of the same, as NIM moderated by ~10bps QoQ to 4.4%. That said, management offered some good news in its updated guidance numbers, calling for deposit repricing pressure to largely be over by the next quarter or two. Its Q3 deposit trend backs this up somewhat – at a +19% YoY pace of growth, the bank is well-equipped to fulfill loan demand, with its 87% loan-to-deposit ratio also screening very attractively within India’s private banking universe. In essence, NIMs may well have bottomed around the 4.4-4.5% mark for ICICI Bank – an impressive outcome in light of ongoing funding cost pressures throughout the sector.

Also key is that the bank has achieved this resilience while staying disciplined on the lending side. Note that the bank under indexes to higher yielding/higher risk unsecured lending – an area that has come under increased regulatory scrutiny in recent months. This discipline also comes through in its capital buffers, with ICICI Bank’s provision coverage still among the highest in the sector. Yet, one-off weather impacts on agriculture notwithstanding, India’s asset quality environment has been rather benign, so I feel quite comfortable underwriting a well-managed credit cost outcome for the bank.

Adding to this earnings tailwind are improvements in fee income in the non-bank businesses (e.g., investment banking, insurance, and asset management, among others). And on the cost side, management has guided to slowing down its headcount additions, which bodes well for operating leverage benefits (i.e., cost growth below top-line growth). So NIM pressure aside, there are more than enough levers here to offset any headwinds and sustain the bank’s financial targets going forward (>2% return on assets). No surprise then that, unlike its private bank peers, ICICI Bank stock has continued to rally post-earnings.

Puts And Takes From Monthly Data; Near-Term Beat-And-Raise Potential

Heading into its upcoming quarter, the stars are aligning positively for ICICI Bank. Monthly system credit growth, per the Reserve Bank of India (RBI), has remained quite strong at +16% YoY. For context, this headline figure comes despite a number of headwinds, most notably a pullback in unsecured retail lending and loans to non-banks after the RBI imposed higher risk weights for these segments in the back half of last year. It also comes on the heels of slower banking system deposit growth (up low-teens % YoY vs. high-teens % YoY for loans) – the result of tight system liquidity conditions. In any case, ICICI Bank’s loan growth has been outpacing the system and should continue to do so, given it hasn’t relied on higher-yielding unsecured loans. Instead, much of its growth has been built on retail and small/medium enterprise lending – both segments that have led system credit growth in recent months.

For now, management has kept its guidance quite manageable into Q4/full-year results. Yes, the expectation is for more credit growth but, crucially, at a moderated pace. Similarly, on the riskier non-bank financing side, the bank has guided for a more disciplined and, therefore, slower growth approach. The key to a beat-and-raise, though, is likely deposits. With system credit growth still running significantly ahead of deposit growth, ICICI Bank’s access to ‘stickier’ and lower-cost retail deposits stands out and should allow it to defy loan growth challenges for the rest of the sector.

Final Thoughts

There’s a good reason ICICI Bank has outperformed its major banking peer, HDFC Bank, in recent months. While both entities now look a lot more similar following the latter’s mega-merger, ICICI Bank’s intact funding cost advantage has set it apart amid a challenging liquidity backdrop. Until the RBI kicks off its easing cycle, expect ICICI Bank’s low-cost funding base to shine through, allowing it to sustain best-in-class lending growth and returns – without taking on balance sheet risk.

In any case, this is a bank still in the very early innings of its long-term growth story, so even if we do see some margin pressure near-term, there’s ample room for earnings to compound much higher over time. Yes, the stock has also rallied, though most of the upside has come out of earnings growth (currently running at 20-30%) rather than multiple expansions. At the current high-teens forward earnings multiple (attractive vs historical trading levels and the bank’s underlying fundamentals), valuations aren’t as demanding as they first appear.