Why Morgan Stanley remains so positive on ICICI Bank

ICICI Bank has been a strong favourite of most of the large institutions. In fact, over 90% of the brokers tracking the ICICI Bank stock have a buy recommendations on the stock. In the latest report from a major global broking house, Morgan Stanley has upped the price of target of ICICI bank by 34% from the current price levels. That is a substantial upside headroom for a stock which is among the top five most valuable companies listed on the NSE and BSE. Before we get into the upgrade of ICICI Bank by Morgan Stanley, here is a quick look at the price history of ICICI Bank from the post COVID period of March 2020 till December 2022. For simplicity, monthly prices have been considered.

Data Source: BSE

The above table shows that the stock of ICICI Bank is up nearly 3-fold since March 2020 as it combined the return to macro normalcy, with a sharp improvement in its financials. In fact, the stock has been doing fairly well since late 2018 when Sandeep Bakshi took charge of the bank and since then there has been a marked improvement in the financials, as we shall see in detail later. The latest boost to the stock price comes from Morgan Stanley with its 34% upside target on the ICICI Bank stock. But why exactly is Morgan Stanley so bullish about ICICI Bank even after this very sharp rally.

Morgan Stanley and its optimism on ICICI Bank

For a long time, the story of Indian banking was about how HDFC Bank had stolen a march over other private banks by growing its book at a frenetic pace, without compromising on asset quality. Several developments in the last few quarters have clouded that impeccable image that HDFC Bank carried. The latest news about the merger of HDFC Bank and HDFC is the latest overhang for the stock and it has remained under pressure. That has opened the playground for ICICI Bank to chip in. Morgan Stanley believes that the strong digital capabilities helped ICICI Bank improve market share in higher-margin segments. It is extremely positive on ICICI bank building market heft in higher margin profit pools.

What has also worked in favour of ICICI Bank is the higher penetration and deepening among high-quality corporates. This has translated into profitable growth of its corporate lending business in the last few quarters. While it may sound slightly futuristic, Morgan Stanley sees the possibility that banks like ICICI Bank may lead the big shift to end-to-end digital originations. This not only proffers the ability to scale up limitlessly but also offers operating leverage over the medium term. Morgan sees ICICI Bank having the best level of preparedness among the private banks to take on the increasing competitive intensity.

Morgan Stanley has used the interesting term “compounding machine”, which is what it expects the bank to generate in the coming quarters. Morgan believes that most investors would be willing to pay a higher multiple for ICICI Bank due to its ability to compound growth rapidly and also avoid the risks of too much exposure to bad assets. Apart from the corporate lending program, ICICI Bank has also been seeing solid traction in the SME lending segment and also in the retail lending segment. However, brokers have underlined that near term triggers may be missing for ICICI Bank, although long term story should compensate.

ICICI Bank Financials – Q2FY23

The best way to get a perspective of the financial strength of ICICI Bank is to look at its recent quarter numbers for September 2022. The bank had reported 14.4% growth in total revenues at Rs45,178 crore on a consolidated basis. In Q2FY23, ICICI Bank showed robust growth across retail banking and corporate banking but subdued growth in treasury. Net interest income (NII) has risen 26% to Rs14,787 crore while NIM surged from 4.00% to 4.31% on yoy basis. Deposits were up 12% on a yoy basis. Here is a financial gist.

What are the key profit takeaways for ICICI Bank? PAT grew 31.4% to Rs. 8,007 crore as improvements in NII and NIMs helped. Gross NPAs fell from 3.41% to 3.19% in the quarter while net NPAs fell from 0.70% to 0.61%. For Q2FY23, the provisions excluding tax, fell by 39% to Rs. 1,644 crore. With PAT margins of 17.72% and capital adequacy of 18.27%, Morgan Stanley sees strong reasons for the stock upgrade.