ICICI Bank: Watch Stake Reduction And Financial Outlook

Elevator Pitch

I have a Hold rating for ICICI Bank's (NYSE:IBN) [ICICIBC:IN] shares.

In my prior January 6, 2023 article for IBN, my focus was on the insights shared by ICICI Bank relating to digital transformation at its Analyst Day held in December last year. I touch on ICICI Bank's reduction of its equity interest in ICICI Lombard [ICICIGI:IN], and its financial outlook with regards to loan growth and net interest margin.

I am concerned about ICICI Bank's potentially weaker financial performance in the coming quarters, but I have a positive view of the value creation potential relating to the sale of a partial equity interest in ICICI Lombard. As such, I maintain a Hold rating for ICICI Bank.

Value Creation Potential With ICICI Lombard's Stake Reduction

India's local news publication, Business Standard, reported earlier on March 10, 2023 that ICICI Bank has obtained the go-ahead from the regulatory authorities to extend the deadline for reducing its equity interest in ICICI Lombard to September 2024 (initial deadline was September 2023).

On its corporate website, ICICI Lombard refers to itself as a "leading private sector general insurance company in India." ICICI Bank currently owns a 48% equity stake in ICICI Lombard, and IBN is now required to lower its interest in ICICI Lombard to under 30% by September next year as per regulatory guidelines.

Based on the latest share price data for ICICI Lombard and ICICI Bank taken from S&P Capital IQ, the 48% stake in ICICI Lombard is worth close to 5% of ICICI Bank's market capitalization. This suggests that there is significant value which can be created with ICICI Bank's sale of a partial +18% equity stake in ICICI Lombard. ICICI Bank has different options when it comes to realizing the value of the company's interest in ICICI Lombard.

If ICICI Bank wishes to maximize its financial gain in the shortest period of time, IBN can choose to sell its stake in ICICI Lombard to a buyer that is willing to pay the highest price.

Alternatively, assuming that ICICI Bank holds a long-term view, it might want to pick a strategic investor to buy its 18% interest in ICICI Lombard or even push for a merger between ICICI Lombard and other companies. As an example, ICICI Lombard mentioned at its 9M FY 2023 earnings call in January this year that the "Health segment continued to be the fastest growing segment for the (Indian insurance) industry." If ICICI Bank finds a buyer which can offer support for ICICI Lombard's growth plans relating to its fastest growing segments such as health insurance, this will definitely boost the value of IBN's remaining 30% interest in ICICI Lombard.

In the next section, I discuss about the financial outlook for ICICI Bank.

Loan Growth And NIM Expansion Aren't Sustainable

Looking forward, the prospects for ICICI Bank's core banking business aren't that favorable.

As disclosed in its most recent quarterly earnings presentation, IBN achieved impressive loan growth rates of +21.3%, +22.7%, and +19.7% for Q1 FY 2023 (YE March), Q2 FY 2023, and Q3 FY 2023, respectively in YoY terms. Separately, ICICI Bank's net interest margin increased from 4.01% in Q1 FY 2023 to 4.31% in Q2 FY 2023, before expanding further to 4.65% for Q3 FY 2023.

But IBN's strong loan growth and meaningful net interest margin expansion are unlikely to be sustained for future quarters.

India's GDP growth rate had already slowed from +6.3% in Q3 2022 (calendar year) to +4.4% for Q4 2022, which came in below the consensus projection of +4.6%. Also, 2022 was an exceptional (calendar) year for ICICI Bank and its peers which might not likely be repeated. IBN acknowledged at its most recent quarterly earnings briefing that "the sharp pricing of liquidity and some shift from bond markets" were major drivers of its robust loan growth for 9M FY 2023 (April 1, 2022 to December 31, 2022). Taking into account the one-off tailwinds in calendar year 2022 and below-expectations GDP growth for India in the recent quarter, I expect ICICI Bank's loan growth rate to moderate to the mid-teens percentage level in the new fiscal year.

Separately, the analysts are forecasting (source: S&P Capital IQ) that ICICI Bank's net interest margin will rise from 4.65% in Q3 FY 2023 to 4.74% and 4.89% for Q4 FY 2023 and Q1 FY 2024, respectively. But the market consensus sees IBN's net interest margin subsequently declining to 4.66%, 4.43% and 4.20% in Q2 FY 2024, Q3 FY 2024, and Q4 FY 2024, respectively. This is because the repricing of deposits in light of rate hikes tends to happen with a time lag as compared to the increase in loan pricing. But it is just a matter of time before the cost of deposits rises to offset the positive effects of favorable loan pricing. ICICI Bank guided at its most recent Q3 FY 2023 results call that it "would expect to see the cost of deposits go up at a sharper pace going forward."

Closing Thoughts

I have a mixed view of ICICI Bank. Although I have a favorable opinion of IBN's sale of a partial stake in ICICI Lombard, I don't think that its core banking business will perform as well as it did in earlier quarters.

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