ICICI Bank Q2 results strong, but margin challenge remains; should you buy or sell the stock?

CLSA has a ‘buy’ rating on ICICI Bank stock, with a target price of Rs 1,225 per share. They believe that the lender return of equity (RoE) is best in class in its peer group.

“ICICI Bank’s return on assets (RoA) of 2.2 percent and RoE of 18 percent are best in class in its peer group. Given the stock’s muted returns over the past year, the stock trades at a reasonable price-to-earnings (PE) ratio or price-to-book (PB) ratio. We adjust PE/PB ratio at 13 times (x)/2.1x for FY25E,” it said in a note post Q2 earnings.

Phillip Capital, too, reiterated a 'buy' call on the counter, saying that they expect continued improvement in the return on risk-weighted
asset for the bank, which is highest in the industry.

"We expect earnings growth of 15.4 percent/13.6 percent in FY24E/25E translating into RoA of 2 percent," they added.

In the past three months, ICICI Bank stock has underperformed Bank Nifty by a percent.

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ICICI Bank margin compression a weak point

However, analysts warned that margin contraction could be a pain-point for the lender going ahead as deposit repricing plays out.

Jefferies, though maintaining a 'buy' call on the counter, cautioned margins could contract up to 20 bps over the next two quarters.

On the other hand, Kotak Institutional Equities flagged that a weak margin profile could affect the bank's operating net profit trajectory.

In Q2FY24, the net interest margin (NIM) of ICICI Bank  contracted by 25 bps QoQ 4.5 percent in Q2FY24 from 4.7 percent in Q1FY24, but expanded 20 basis points (bps) YoY.

Going ahead, the management expects cost of funds to rise for another quarter, but sees full year NIM for FY24E to be stable versus FY23.

Analysts at Prabhudas Lilladher, thus, believe that the bank's better treasury management and lower funding cost could help offset pressure on NIM going ahead. The brokerage firm reiterated a 'buy' rating on the counter, upgrading target price to Rs 1,280 per share (versus Rs 1,180).

ICICI Bank’s robust Q2 earnings metrics: Strong loans and deposits portfolio

Morgan Stanley shared an ‘overweight’ call on the counter, with a target price of Rs 1,350 per share. It said that ICICI Bank has continued to deliver strong balance sheet growth – both loans and deposits.

Bernstein has an 'market perform' call on ICICI Bank shares, with a target price of Rs 1,050 apiece, noting that they saw a healthy earnings per share (EPS) growth of 35 percent YoY in Q2FY24.

Except for NIM disappointment, other parameters remain intact for the bank whether it is deposit growth or asset quality.

Provisions for the quarter slipped 64 percent YoY to Rs 583 crore and 55 percent quarter-on-quarter (QoQ) from Rs 1,292 crore in Q1FY24.

Gross non-performing assets (GNPAs) declined to 2.48 percent of gross advances in Q2FY24 from 2.76 percent in the year-ago period. Likewise, net NPAs or bad loans slipped 0.43 percent in Q2FY24 as against 0.61 percent in Q2FY23.

Advances grew 18 percent YoY in Q2FY24 led by growth in domestic or retail loans, whereas on the liability side, deposits grew 19 percent YoY in the September-ended quarter.

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