Are ICICI Bank shares a good pick?

Introduction

Recently, the ICICI Bank share has seen a significant upswing and market sentiments suggest that investors strongly believe it will continue its stellar performance. The reasons are:

Fundamental Performance

The last five years’ performance is a strong indicator of the market sentiment of offering ICICI Bank higher valuations due to its fundamental improving metrics. Some specific advantages that ICICI Bank has over most of its competitors are its low cost of funds due to its excellent CASA ratios and recent focus towards growing its granular retail loan book bolstered by its digital initiatives, which in turn have already led to reduced NPA figures.

However, since the ICICI Bank share price is already re-rated concerning its valuation multiples, future growth in the share price is expected to come from earnings growth geared by the expected upcoming credit growth cycle. In its last AGM, the bank also addressed that it will now look forward to growing the number of branches to increase its reach, one of the very few metrics where the bank lagged its top competitors.

Infra Bonds

The bank has also decided to raise funding through infra-bonds worth Rs. 10,000 crorein its effort to raise low-cost funds beyond CASA for project financing and affordable housing and has received the necessary approvals for the same from RBI. These are long-term bonds with a maturity period of at least seven years, and the higher chances of infrastructure loans becoming stressed assets have made private sector banks wary of fresh lending, and this is the market gap that ICICI Bank aims to fill.

An additional benefit of these bonds is that the bank can benefit from the exemption of CRR and SLR, thus avoiding asset-liability management problems usually seen in infra loans. Based on the prospective loan book, the credit rating agency ICRA has already assigned an “AAA” rating to the bonds.

Earnings Report

The bank reported its Q1 earnings on July 23, and the ICICI share price has risen 12% since then. It reported a 50% YOY growth in its Profit after Tax to Rs. 6,905 crore, a 21% YOY growth in its Net Interest Income to Rs. 13,210 crore while having a net interest margin of 4.92%. Its gross non-performing assets fell to 3.41% from 5.15% last quarter.

With strong concentration towards growing its retail loan book, one of the best-in-class provision coverage ratios and additionally aided by recent RBI rate hikes, market participants believe that the bank will continue to grow strong, and its current valuations look attractive, especially when compared to global banks as evidenced by its growing FII ownership.