Analyst call tracker: ICICI Bank top pick in banking space; Kotak Mahindra least favourite

ICICI Bank shares have gained 8 percent in a month, whereas Kotak Mahindra Bank surged 5 percent

Private sector lender ICICI Bank has emerged as Dalal Street’s top pick in the banking space amid steady July-September quarter (Q2FY24) results while Kotak Mahindra Bank saw maximum pessimism in November among analysts due to management overhaul, showed Moneycontrol’s analyst call tracker.

In November, about 16 brokerages shared a ‘hold’ call for Kotak Mahindra Bank, 5 shared a ‘sell’ call, and 23 shared ‘buy’ ratings. On the other hand, ICICI Bank has 48 ‘buy’ calls, 3 ‘hold’ calls, and no ‘sell’ rating. Overall, the optimism rate stood at 94.12 percent in November, data showed.

Analysts at Emkay Global, for instance, trimmed target price multiple for Kotak Mahindra Bank to 2.6x Sep-25E ABV from 2.8x Jun-25E ABV, factoring in management transition-related risks. “Kotak Mahindra Bank’s new MD & CEO, Ashok Vashwani has the tall task of managing senior management attrition or business dislocation and filling the larger shoes of ex-CEO Uday Kotak,” the brokerage firm said, sharing a ‘hold’ rating on the counter, with a target price of Rs 1,955 per share (current market price: Rs 1,843)

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Meanwhile, analysts at JM Financial believe that ICICI Bank firmly remains on the path to deliver 2.2 percent/18 percent average RoA/RoE over FY24-25E with stable asset quality and continued growth momentum. Moreover, they expect favourable growth and good execution to benefit ICICI Bank. The brokerage firm had shared a ‘buy’ rating on the counter, with a target price of Rs 1,155 per share (CMP: Rs 1,017)

ICICI Bank shares have gained 8 percent in a month, whereas Kotak Mahindra Bank surged 5 percent. In comparison, the Bank Nifty climbed 8 percent.

ICICI Bank clocked 35.5 percent year-on-year (YoY) growth in standalone profit at Rs 10,261 crore in Q2FY24, while net interest income (NII) jumped 24 percent YoY as bad loan provisions saw a significant drop.

However, analysts warned that margin contraction could be a pain point for the lender going ahead as deposit repricing plays out. Going ahead, the management expects the cost of funds to rise for another quarter but sees full-year net interest margin (NIM) for FY24E to be stable versus FY23.

Except for the NIM disappointment, other parameters remain intact for the bank, whether deposit growth or asset quality. Gross non-performing assets (GNPAs) declined by 28 basis points (bps) YoY in Q2FY24 while advances grew 18 percent YoY.

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As for Kotak Mahindra Bank, the lender saw a 24 percent YoY increase in the second quarter standalone net profit, whereas NII rose 23 percent YoY.

Deposit growth, too, was strong at 23 percent YoY but CASA slipped to 48 percent from the high range of 50s and thus weighed on cost of funds. NIMs contracted by 35 bps sequentially mainly due to higher cost of funds.

Going forward, analysts believe that margins for Kotak Mahindra Bank could be under pressure as the cost of funds stays in catch-up mode as do peers. Kotak Bank’s slippages were higher than expected for the second quarter in a row due to the grossing up of NPAs during the quarter, said analysts at Emkay Global.

Analysts at CLSA noted that ICICI Bank’s return on equity (RoE) is best in class versus its peer group. The brokerage firm shared a ‘buy’ rating for the lender, with a target price of Rs 1,225 apiece.

“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.

Besides that, Phillip Capital analysts expect continued improvement in the return on risk-weighted assets for the bank, which is the highest in the industry. “We expect earnings growth of over 15.4 percent/13.6 percent in FY24E/25E translating into RoA of 2 percent,” the brokerage firm said, maintaining a ‘buy’ rating on the counter, with a target price of Rs 1,140.

In a surprising move, the RBI cleared the appointment of Ashok Vaswani as the MD & CEO of Kotak Bank, effective January 1, 2024, for three years, superseding the internal candidates (EDs). It is unclear if Vaswani was the bank’s preferred recommendation or if his appointment is an unanticipated RBI decision.

Notably, Vaswani has a long and rich work experience in the consumer, corporate and digital banking arenas, given his long stint with global banks like Citigroup and Barclays as well as his recent leadership role in a US-Israeli AI firm.

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“We believe the new MD & CEO has a tall task on his hands to manage senior management attrition or business dislocation, if any, typically seen post top-management changes in banks; meeting investors’ high expectations as did the outgoing MD & CEO Uday Kotak is another cap to don for Vaswani,” said analysts at Emkay Global.