Margins cross 3% level, asset quality begins to resemble peers

Big beat?This has been a strong quarter, quantitatively and qualitatively: (i) Profits up 31%-8% ahead of expectations; (ii) Margins up 26bps+ to over 300bps ?well beyond expectations; (iii) Asset quality comfortable (NPL?s fall, restructurings rise)?bucking broader industry expectations; and (iv) There is a slight step-up in asset growth. Bottom line, it?s a well-above-expectation quarter? and the stock has expectedly reacted positively and moved up 3% post-result announcement.

Is this the structural step up the market has waited a couple of years for?

ICICI Bank?s (i) balance-sheet has now grown after a four-year stall; (ii) Its margins have breached 3% after years of disappointment; (iii) Asset quality is in control and beginning to resemble peer private banks; and (iv) Subsidiaries?offshore and domestic?are beginning to throw back cash/capital (barring a one-time hit in general insurance); and (v) the bank has now gone through a couple of quarters of no big disappointments, or misses. We expect to hear more ?re-rating? chatter, which should lend an upward bias to the stock.

But, ICICI Bank is a big ship, and it?s not all smooth sailing?It?s not all up; there are structural/ growth issues that still need to show more decisive direction? and momentum. These include (i) Deposit growth?flat year-on-year with net BS (balance sheet) expansion is funded entirely by domestic/offshore borrowing; (ii) Fee income growth; flat?not so for peers, and loan mix suggests this shouldn?t be so; (iii) Offshore book?doing well, but remains unpredictable from a growth/ profitability/franchise perspective; (iv) Asset quality?restructuring is still on, and some defensiveness on account of a few names. There remains work to be done; apart from normalising ROE (return on equity) further, and there remain questions?but relatively more nuanced than the many over the last decade.

Management: Confident, but careful?management is positive on outlook regarding growth (+20% domestic book), margins (+10-15bps, but less than in Q4), and asset risk (75bps credit cost?stable )?though one senses ?cautious optimism? rather than bullishness.

The stock should continue to go up: In our opinion, the quarter?s been a good one; numbers are up, enough justification for the market to at least start talking about a re-rating; we maintain our positive bias on the stock, and our target price of R1,035.

Investment strategy: We rate ICICI Bank as Buy. We believe the business offers meaningful upside on fundamental operating improvements (margins, asset quality, business balance, and leverage on its franchise), and its profitability has been improving continuously.

The bank?s management has made aggressive strategic moves in the right direction and remained firm on its steady growth/low risk path. This signifies healthy longer-term prospects for the business. There are some near-term pressures such as low ROEs and a large infrastructure, corporate, international lending book, but we believe the current valuations offer a reasonable risk/return trade off.

Its financial services subsidiaries, particularly insurance, also add meaningful value and complement its core banking business, but we believe value gains will probably be more back-ended due to current volatility in the financial services segments. We believe the recent consolidation in ICICI Bank?s core business could be a meaningful longer term upside for the stock. Key downside risks include disappointments on business performance; lower growth and suppressed return profile, which still remains relatively low.